SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported):
November 30, 2005
ASHLIN DEVELOPMENT CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
Florida 000-29245 65-0452156
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State of Commission IRS Employer
Incorporation File Number I.D. Number
1479 North Clinton Avenue, Bay Shore, NY 11706
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Address of principal executive offices
Registrant's telephone number: (631)968-5000
4400 North Federal Highway, Suite 210, Boca Raton, FL 33431
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(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT;
Item 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS;
Item 2.03 CREATION OF A DIRECT FINANCIAL OBLIGATION OR AN OBLIGATION UNDER AN
OFF-BALANCE SHEET ARRANGEMENT OF A REGISTRANT;
Item 3.02 UNREGISTERED SALES OF EQUITY SECURITIES;
Item 3.03 MATERIAL MODIFICATION TO RIGHTS OF SECURITY HOLDERS;
Item 5.01 CHANGES IN CONTROL OF REGISTRANT;
Item 5.02 DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF DIRECTORS &
APPOINTMENT OF PRINCIPAL OFFICERS;
Item 5.06 CHANGE IN SHELL COMPANY STATUS.
Summary:
As previously reported, Ashlin Development Corporation, a Florida
corporation ("we" or the "Company"), and our newly-formed subsidiary had entered
into a Merger Agreement (the "Merger Agreement"), dated as of November 14, 2005,
with Gales Industries Incorporated, a privately-held Delaware corporation
("Gales Industries"), which did not have any business operations other than in
connection with the transactions contemplated by the Merger Agreement. Pursuant
to the Merger Agreement, Gales Industries merged (the "Merger") on November 30,
2005 (the "Closing Date") into our wholly-owned subsidiary, Gales Industries
Merger Sub, Inc. ("Merger Sub"), which we recently incorporated in the State of
Delaware for the purpose of completing the Merger. Merger Sub was the surviving
company in the Merger. Contemporaneously with the closing of the Merger, Gales
Industries acquired all of the outstanding capital stock of Air Industries
Machining, Corp., a New York corporation ("AIM") (the "Acquisition"). (The
initial acquiror of AIM's outstanding capital stock was a newly-formed
wholly-owned subsidiary of Gales Industries, called Gales Industries Acquisition
Corp., Inc., ("Acquisition Corp."), a Delaware corporation. Acquisition Corp.
initially acquired all of the outstanding capital stock of AIM as of the Closing
Date and contemporaneously merged into AIM, with AIM being the surviving
corporation, and distributed the outstanding capital stock of AIM to Gales
Industries. The result was that AIM became the wholly-owned subsidiary of Gales
Industries as though Gales Industries itself acquired all of the outstanding
capital stock of AIM as of the Closing Date.)
Immediately prior to the completion of the Merger, Gales Industries
received $6,793,280 in gross proceeds from the first closing of a private
placement to accredited investors of convertible preferred stock which, pursuant
to the Merger, have been exchanged for the Series A Convertible Preferred Stock,
$.001 par value per share ("Preferred Stock"), of the Company. The shares of
Preferred Stock issued in connection with such private placement as of the
Closing Date are, in the aggregate, immediately convertible into 30,878,855
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shares of our common stock, $.001 par value per share ("Common Stock"), after
giving effect to the reverse split of our Common Stock, described below. (Such
share number of 30,878,855 does not take into account the shares of Common Stock
which may be issued upon conversion of the additional shares of Preferred Stock
issuable to the investors as dividends.)
Thus, as of the Closing Date, we acquired indirect ownership of all of the
outstanding capital stock of AIM. In return, we issued shares of Common Stock
resulting in a change in control of the Company. AIM manufactures aircraft
structural parts and assemblies principally for prime defense contractors in the
aerospace industry and, following the Merger, the business of AIM constituted
our only operations. We experienced, as of the Closing Date, a change in control
of our ownership, management and Board of Directors.
The aggregate purchase price paid to AIM's four shareholders for 100% of
the capital stock of AIM was as follows: (i) $3,114,296 in cash, (ii) $1,627,262
principal amount of promissory notes, and (iii) 490,060 shares of common stock.
A portion of the proceeds from the first closing of the Offering was used to pay
such purchase price. In addition, we distributed approximately $690,000 to AIM's
shareholders in satisfaction of certain loans from them to AIM and to enable
them to pay income taxes accrued while operating AIM as a Subchapter S
corporation.
Pursuant to the terms of the Merger Agreement, we were required, prior to
the closing of the Merger, to effect a 1-for-1.249419586 reverse split of our
Common Stock (the "Reverse Split"). The Reverse Split became effective as of
November 21, 2005. The Reverse Split reduced the number of shares of Common
Stock which we had outstanding on a fully diluted basis (4,707,813, which
consisted of 4,652,813 shares and 55,000 stock options) to approximately
3,768,000. As a result of the Reverse Split, the conversion of the outstanding
shares of Gales Industries pursuant to the Merger for new shares of our Common
Stock was on a one-for-one basis. Any of our shareholders who, as a result of
the Reverse Split, held a fractional share of Common Stock received a whole
share of Common Stock in lieu of such fractional share. All share numbers set
forth in this report, unless otherwise noted, give effect to the Reverse Split
but do not take into account the whole shares issued in lieu of the fractional
shares resulting from the Reverse Split. In connection with the Reverse Split,
we amended our Articles of Incorporation to reduce our total authorized Common
Stock from 150,000,000 shares to 120,055,746 shares. After giving effect to the
Reverse Split, prior to the Merger, we had outstanding approximately 3,723,980
shares of Common Stock and had outstanding stock options exercisable into
approximately 44,020 shares of our Common Stock. Such 3,723,980 shares and
44,020 stock options continued to be outstanding after, and were not cancelled
or redeemed pursuant to, the Merger. The approximately 3,723,980 shares of our
Common Stock outstanding immediately prior to the Merger constitute
approximately 7% of our Common Stock outstanding on a fully-diluted basis
immediately after the Merger, subject to further dilution if additional Units of
Preferred Stock are sold in the Offering (defined below).
Immediately following the Merger, we owned 100% of the outstanding capital
stock of Merger Sub, which owned all of the outstanding capital stock of AIM. On
a fully-diluted basis, we issued in connection with the Merger an aggregate of
approximately 52,600,710 shares of our Common Stock (or approximately 93.3% of
the outstanding on a fully-diluted basis), after taking into account the shares
underlying the preferred stock, placement agent warrants, stock options and
convertible notes which were previously convertible or exercisable into shares
of Gales Industries common stock but pursuant to the Merger have become
preferred stock, warrants, options and convertible notes that are convertible or
exercisable into shares of our Common Stock.
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Contemporaneously with or immediately prior to the closing of the Merger
and the Acquisition: (i) Gales Industries completed the private placement (the
"Offering") to accredited investors of 679.328 shares (for gross proceeds of
$6,793,280) of Gales Industries' Series A Convertible Preferred Stock, par value
$.0001 per share ("Gales Preferred Stock"); (ii) we designated 1,000 shares of
our preferred stock, $.001 par value per share, to constitute a new series of
preferred stock entitled "Series A Convertible Preferred Shares" (the "Series A
Preferred Stock"), with terms, rights and preferences which are the same as
those of the Gales Preferred Stock; (iii) AIM completed the acquisition from
affiliates of AIM, for $4,190,000, of a three-building (76,000 square feet),
5.4-acre corporate campus which was being leased prior to the Closing Date by
AIM in Bay Shore, New York (the "Real Estate Acquisition"); and (iv) AIM entered
into with PNC Bank a loan facility (the "New Loan Facility"), secured by all of
its assets and the real property acquired in the Real Estate Acquisition,
providing AIM with up to $14,000,000 in debt facilities as follows: $9,000,000
in a revolving credit facility, $3,500,000 in a term loan, and $1,500,000 in new
equipment financing.
Upon completion of the New Loan Facility with PNC Bank, we paid to a third
party a finder's fee consisting of $125,000 and 325,000 shares of Common Stock
(which shares have a total value of $71,500 assuming a per share value of $0.22
per share). Such shares were contributed to such third party by Michael Gales
and did not require the issuance of additional shares by the Company. In
addition, upon closing of the New Loan Facility, AIM retained such third party
as a consultant for a 36-month period for a monthly fee of approximately $3,500.
Prior to the Merger, Gales Industries had adopted a Stock Incentive Plan
providing for the issuance of up to 10,000,000 shares of its common stock and
had issued from such plan options exercisable into 4,850,000 shares of its
common stock. Pursuant to the Merger, such options became options to purchase
the same number of shares of our Common Stock. Our 1998 Stock Option Plan, under
which approximately 956,000 shares of Common Stock remain available for future
issuance, remained in effect upon completion of the Merger.
GunnAllen Financial, Inc., a Delaware corporation, acted as Placement
Agent in the Offering ("Placement Agent") and received: (i) a sales commission
equal to 6%, and a management fee equal to 4%, of the aggregate purchase price
of the Units sold and (ii) a non-accountable expense allowance equal to 2% of
the aggregate purchase price of the Units sold. In addition, the Placement Agent
received warrants (the "Placement Agent Warrants"), exercisable during a
five-year term, to purchase the number of shares of Common Stock equal to 10% of
the number of shares of Common Stock into which the Preferred Stock sold in the
Offering may be converted. The Placement Agent Warrants have a "cashless
exercise" feature and are exercisable at the price per share equal to the per
share conversion price-equivalent with respect to the Preferred Stock.
Additional closings of the Offering may be held until the completion of
the sale of up to an aggregate maximum of 80 Units (for gross proceeds of
$8,000,000; referred to as the "Maximum Offering"). In addition, the Maximum
Offering may be increased by up to 10 Units ($1,000,000) to cover any
over-subscriptions (the "Over-Allotment Option"). The investors in the Offering
will automatically receive, in exchange for the Gales Preferred Stock which they
subscribe for in the Offering, shares of our Series A Preferred Stock. The
proceeds of the Offering, in general, were and will be used for paying the cash
portion of the purchase price for the Acquisition, for paying expenses relating
to the Offering, Acquisition, Merger and related transactions, for the repayment
of up to $150,000 in promissory note obligations which Gales Industries incurred
in bridge financings, and for working capital for us and AIM. A portion of the
proceeds from the New Loan Facility was used to pay for the Real Estate
Acquisition. In addition, proceeds from the New Loan Facility were used to pay
off AIM's debt to its prior lender and certain of AIM's shareholders, totaling
approximately $5,800,000, and will be used for working capital for AIM's
business.
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As of the Closing Date, we issued 10,645,817 shares of Common Stock in
connection with the Merger to pre-existing Gales Industries shareholders and to
those who became shareholders of Gales Industries as of the Closing Date,
including former shareholders of AIM. We also issued 100,000 shares to a
director of the Company in consideration for his agreement to remain on the
Board. Upon completion of the first closing of the Offering, the Placement Agent
in the Offering received warrants to purchase shares of Gales Industries' common
stock which, pursuant to the Merger, have become warrants to purchase 3,087,885
shares of our Common Stock at the exercise price of $0.22 per share. Immediately
prior to the Merger, Gales Industries had outstanding options to purchase shares
of Gales Industries' common stock which, pursuant to the Merger, have become
options to purchase 4,850,000 shares of our Common Stock at the exercise price
of $0.22 per share. The investors in the first closing of the Offering hold
shares of our Series A Preferred Stock which, in the aggregate (not including
shares of Preferred Stock which may be issued as dividends), may be converted
into 30,878,855 shares of our Common Stock at the conversion price of $0.22 per
share. In the event the Maximum Offering is completed, the investors in the
Offering will hold shares of our Series A Preferred Stock which, in the
aggregate, may be converted into 36,364,000 shares of our Common Stock.
Immediately prior to the Merger, Gales Industries had outstanding certain bridge
notes convertible into shares of Gales Industries' common stock and certain
bridge warrants to purchase shares of Gales Industries' common stock; these
notes and warrants have, pursuant to the Merger, become notes convertible into
409,090 shares of our Common Stock at the conversion price of $0.22 per share
and warrants to purchase 1,090,909 shares of our Common Stock at the exercise
price of $0.22 per share. In connection with the Acquisition, former
shareholders of AIM received, as of the Closing Date, promissory notes
convertible into shares of Gales Industries' common stock which, pursuant to the
Merger, have become notes convertible into an aggregate of 1,663,154 shares of
our Common Stock at the conversion price of $0.40 per share.
In connection with the Merger, Theodore T. Alfen and Steven Pomerantz
resigned as members of our Board of Directors, leaving James A. Brown as the
sole director, and Mr. Brown resigned as our Chief Executive Officer. The sole
director then appointed additional members to the Board, effective as of the
date of the Merger, so that our Board of Directors now consists of the following
members: Michael A. Gales (Chairman), Louis A. Giusto (Vice Chairman), Peter D.
Rettaliata, Dario A. Peragallo, Stephen M. Nagler, Seymour G. Siegel,
Rounsevelle W. Schaum, Ira A. Hunt, Jr. and James A. Brown. The sole director,
simultaneously with the appointment of new directors to the Board, appointed new
officers of the Company as follows: Michael A. Gales as Executive Chairman of
the Board, Louis A. Giusto as Vice Chairman, Chief Financial Officer and
Treasurer, Peter D. Rettaliata as Chief Executive Officer and President, Dario
Peragallo as Executive Vice President of Manufacturing and Stephen M. Nagler as
Secretary Mr. Siegel is expected to be the chairman of the audit committee of
the Board and Mr. Schaum is expected to be the chairman of the Compensation
Committee of the Board.
Immediately prior to the Merger, we had no operations and had net assets
consisting only of cash and cash equivalents.
As of August 24, 2005, our shareholders approved an amendment to our
Articles of Incorporation which increased the number of our authorized shares of
Common Stock, $.001 par value per share, from 30,000,000 to 150,000,000 shares,
and authorized 10,000,000 shares of "blank check" preferred stock, $.001 par
value per share. In connection with the Reverse Split, our total authorized
Common Stock was reduced to 120,055,746 and our total authorized preferred stock
was reduced from 10,000,000 shares to 8,003,716 shares.
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We believe that the issuances of our Common Stock in connection with the
Merger were exempt from registration under Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act").
Explanatory Note.
Unless otherwise indicated or the context otherwise requires, all
references below in this Report on Form 8-K to "we," "us" and the "Company" are
to Ashlin Development Corporation, a Florida corporation, together with its
wholly-owned subsidiary, Gales Industries Merger Sub, Inc., a Delaware
corporation, and Air Industries Machining, Corp., a New York corporation, which
is a wholly-owned subsidiary of Gales Industries Merger Sub, Inc. Specific
discussions or comments relating only to Ashlin Development Corporation prior to
the Merger will reference "Ashlin", those relating only to Gales Industries
Merger Sub, Inc. will reference "Merger Sub", those relating only to Air
Industries Machining, Corp. will reference "AIM", and those relating only to
Gales Industries Incorporated prior to the Merger will reference "Gales
Industries".
Cautionary Notice Regarding Forward Looking Statements
We desire to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. This Report on Form 8-K contains a
number of forward-looking statements that reflect management's current views and
expectations with respect to our business, strategies, products future results
and events and financial performance. All statements made in this Report other
than statements of historical fact, including statements that address operating
performance, events or developments that management expects or anticipates will
or may occur in the future, including statements related to distributor
channels, volume growth, revenues, profitability, new products, adequacy of
funds from operations, statements expressing general optimism about future
operating results and non-historical information, are forward looking
statements. In particular, the words "believe," "expect," "intend," "
anticipate," "estimate," "may," "will," variations of such words, and similar
expressions identify forward-looking statements, but are not the exclusive means
of identifying such statements and their absence does not mean that the
statement is not forward-looking. These forward-looking statements are subject
to certain risks and uncertainties, including those discussed below. Our actual
results, performance or achievements could differ materially from historical
results as well as those expressed in, anticipated or implied by these
forward-looking statements. We do not undertake any obligation to revise these
forward-looking statements to reflect any future events or circumstances.
Readers should not place undue reliance on these forward-looking
statements, which are based on management's current expectations and projections
about future events, are not guarantees of future performance, are subject to
risks, uncertainties and assumptions (including those described below) and apply
only as of the date of this Report. Our actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed below in "Risk
Factors" as well as those discussed elsewhere in this Report, and the risks to
be discussed in our next Annual Report on form 10-KSB and in the press releases
and other communications to shareholders issued by us from time to time which
attempt to advise interested parties of the risks and factors that may affect
our business. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
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1. Description of Business.
About AIM
Following the Merger, the business of AIM constituted our only operations.
Founded in 1969, AIM manufactures aircraft structural parts and assemblies
principally for prime defense contractors in the aerospace industry including,
Sikorsky, Lockheed Martin, Boeing and Northrop Grumman. Approximately 85% of
AIM's revenues are derived from parts and assemblies directed toward military
applications, although direct sales to the military (U.S. and NATO) constitute
less than 10% of AIM's revenue. AIM is known as a provider of critical and
complex structures for demanding customers: AIM's parts are installed onboard
Sikorky's VH-3D, otherwise known as Marine One, the primary Presidential
helicopter and on Air Force One, Boeing's 747-2000B customized for use by the
President.
AIM has evolved from being an individual parts manufacturer to being a
manufacturer of subassemblies (i.e. being an assembly constructor) and being an
engineering integrator. AIM currently produces over 2,400 individual parts that
are assembled by a skilled labor force into electromechanical devices, mixer
assemblies, helicopter rotorhub components, rocket launching systems for the
F-22 Raptor Advanced Stealth Fighter, arresting gears for E2C and other US Navy
Fighters, vibration absorbing assemblies for a variety of Sikorsky helicopters,
landing gear components for the F-35 Joint Strike Fighter, and many other
subassembly packages. AIM's major customers recognize its achievements in
manufacturing quality control, which include ISO 9001 and AS9100 Certifications
as well as several highly technical, customer-based proprietary quality
approvals.
AIM is the largest supplier of flight safety components for Sikorsky.
Sales of parts and services to Sikorsky account for more than 40% of AIM's
revenue, and are subject to General Ordering Agreements which were recently
renegotiated and extended through 2010. These revised agreements included upward
price adjustments that the Company estimates will increase net earnings by more
than $600,000 in 2005, and continue to positively impact the Company's
profitability in 2006.
Government Regulation
Environmental Regulation
We are subject to regulations administered by the United States
Environmental Protection Agency, the Occupational Safety and Health
Administration, various state agencies and county and local authorities acting
in cooperation with federal and state authorities. Among other things, these
regulatory bodies impose restrictions to control air, soil and water pollution,
to protect against occupational exposure to chemicals, including health and
safety risks, and to require notification or reporting of the storage, use and
release of certain hazardous chemicals and substances. The extensive regulatory
framework imposes compliance burdens and risks on us. Governmental authorities
have the power to enforce compliance with these regulations and to obtain
injunctions or impose civil and criminal fines in the case of violations.
The Comprehensive Environmental Response, Compensation and Liability Act
of 1980 (CERCLA) imposes strict, joint and several liability on the present and
former owners and operators of facilities that release hazardous substances into
the environment. The Resource Conservation and Recovery Act of 1976 (RCRA)
regulates the generation, transportation, treatment, storage and disposal of
hazardous waste. In New York, the handling, storage and disposal of hazardous
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substances are governed by the Environmental Conservation Law, which contains
the New York counterparts of CERCLA and RCRA. In addition, the Occupational
Safety and Health Act, which requires employers to provide a place of employment
that is free from recognized and preventable hazards that are likely to cause
serious physical harm to employees, obligates employers to provide notice to
employees regarding the presence of hazardous chemicals and to train employees
in the use of such substances.
Federal Aviation Administration Regulation
We are subject to regulation by the Federal Aviation Administration (FAA)
under the provisions of the Federal Aviation Act of 1958, as amended. The FAA
prescribes standards and licensing requirements for aircraft and aircraft
components. We are subject to inspections by the FAA and may be subjected to
fines and other penalties (including orders to cease production) for
noncompliance with FAA regulations. Our failure to comply with applicable
regulations could result in the termination of or our disqualification from some
of our contracts, which could have a material adverse effect on our operations.
Government Contract Compliance
Our government contracts and those of many of our customers are subject to
the procurement rules and regulations of the United States government. Many of
the contract terms are dictated by these rules and regulations. During and after
the fulfillment of a government contract, we may be audited in respect of the
direct and allocated indirect costs attributed thereto. These audits may result
in adjustments to our contract costs. Additionally, we may be subject to U.S.
government inquiries and investigations because of our participation in
government procurement. Any inquiry or investigation can result in fines or
limitations on our ability to continue to bid for government contracts and
fulfill existing contracts.
We believe that we are in substantial compliance with all federal, state
and local laws and regulations governing our operations and have obtained all
material licenses and permits required for the operation of our business.
Employees
AIM employs approximately 144 principally union employees and maintains
what it believes are, and what historically has been, good relationships with
its union.
Future Expansion and Acquisition Strategy
The Company intends to seek to expand its operations through internal
growth and additional strategic acquisitions. The Company will seek to attract
new customers through proactive industry marketing efforts including direct
sales programs, participation at trade shows, technical society meetings and
similar activities. Additionally, the Company will seek to capitalize on its
engineering capabilities by partnering with other lower cost manufacturers which
can benefit from the Company's expertise.
With respect to consolidation strategy, the Company will focus on
acquiring profitable, privately held entities or divisions of larger entities
with annual sales between $15 and $50 million in the aerospace and military
fields. The Company will initially seek enterprises whose products are
complementary to AIM's current product line and which can benefit from the
Company's existing engineering talents and manufacturing capabilities. The
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Company will look for candidates whose products are components of larger mission
critical systems and which can be upgraded from simple parts to complex,
higher-margin component system subassemblies through the use of AIM's
engineering talents. The Company intends to focus on entities with reputations
for high quality standards whose management can be absorbed into the Company.
When possible, the Company will seek to combine existing operations to absorb
excess capacity and eliminate duplicative facilities. It is contemplated that
these future acquisitions will be facilitated by using either the Company's
stock, cash or debt financing, or some combination thereof.
Ashlin Bankruptcy
On October 15, 2004, Ashlin (then known as Health & Nutrition Systems
International, Inc.) filed in the southern district of Florida a plan of
reorganization under Chapter 11 of the United States bankruptcy code. The Court
confirmed Ashlin's plan of reorganization ("Plan of Reorganization") on January
10, 2005 and the Plan of Reorganization was declared effective on January 21,
2005. Ashlin formally emerged from bankruptcy protection on April 29, 2005
without any operating business. After emerging from bankruptcy protection and
prior to the Merger, Ashlin was a "shell" company.
As part of the Plan of Reorganization:
1. TeeZee, Inc., a company formed by Ashlin's former Chief Executive
Officer, Christopher Tisi, purchased substantially all of the assets of Ashlin,
including the rights to the name "Health & Nutrition Systems International,
Inc." in exchange for $350,000 in cash and assumption of approximately
$1,841,000 in liabilities. Although competing bids were allowed for under the
Plan of Reorganization, no other bids for Ashlin's assets were submitted.
2. Ashlin entered into an employment agreement with Mr. James A. Brown,
which provided for:
o Salary of $9,200 per month until the 30th calendar day
following Ashlin's discharge from bankruptcy, and thereafter
at a rate of $7,000 per month; and
o The issuance by Ashlin to Mr. Brown of 300,000 shares of
Common Stock.
3. TeeZee, Inc. assumed the secured claim of Garden State Nutritionals
(GSN), a division of Vitaquest International, Inc.; GSN retained its
pre-existing lien on substantially all of the transferred assets.
4. TeeZee, Inc. assumed the secured claim of SunTrust Bank on Ashlin's
2004 Honda Element on the effective date; SunTrust retained its pre-existing
lien on the vehicle.
5. TeeZee, Inc. assumed most of the unsecured claims, including those of
trade and employee creditors, together with any unsecured deficiency claims of
GSN and SunTrust. The unassumed unsecured claims of Ashlin were paid, pro rata,
from a fund which did not exceed $50,000.
6. A permanent injunction was issued barring Ashlin and the TeeZee, Inc.
from violating Window Rock Enterprises, Inc.'s trademarks for "CortiSlim" and
Ashlin agreed not to challenge Window Rock's trademark for this product.
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7. All holders of Ashlin's common stock retained their shares.
After the effective date of the Plan of Reorganization, Ashlin continued
to exist as a separate incorporated entity, with James A. Brown, Steven
Pomerantz and Ted Alflen continuing to serve as directors of Ashlin, and Mr.
Brown continuing to serve as CEO and Chairman of the Board of Directors. Mr.
Brown was the sole officer of Ashlin from the effective date of the Plan of
Reorganization to the date of the Merger. As a result of the Merger, Mr. Brown's
employment agreement with Ashlin was terminated and he waived his rights under
the employment agreement.
From its inception through the effective date of the Plan of
Reorganization, Ashlin was known as Health & Nutrition Systems International,
Inc. and developed, marketed and sold weight management, energy and sport
nutrition products to national and regional, food, drug, health, pharmacy,
mass-market accounts, and independent health and pharmacy accounts. Its product
formulations were not proprietary.
Risk Factors
Risks of the Acquisition
AIM's business is the Company's only operating business. There can be no
assurance that any benefits to AIM's business will be achieved from the Merger,
Acquisition, Real Estate Acquisition, New Loan Facility or Offering
(collectively, the "Closing Transactions") or that the results of operations of
AIM prior to the Acquisition will be not be adversely impacted by the Closing
Transactions. As of the Closing Date, Luis Peragallo and Jorge Peragallo
resigned from their positions with AIM. Even though Peter Rettaliata and Dario
Peragallo, two of AIM's officers, will serve as officers of the Company, there
can be no assurance that the new management of the Company will have the
necessary experience to operate the Company. The process of combining the
organizations of Gales Industries, AIM and Ashlin could interrupt the activities
of part or all of AIM's business, and could cause fundamental changes in AIM's
business, which could have an adverse effect on the Company. The past results of
operations of AIM are not necessarily indicative of the future results of
operations of the Company.
Limited Recourse Against AIM Shareholders
Pursuant to the stock purchase agreement relating to the Acquisition, the
obligation of the former shareholders of AIM (the "AIM Shareholders") to
indemnify the Company for breaches of their representations and warranties is,
with certain exceptions, limited to $2.5 million. Consequently, the Company will
have no recourse against the AIM Shareholders for claims in excess of such
amount.
The inability to successfully manage the growth of our business may have a
material adverse effect on our business, results or operations and financial
condition.
We expect to experience growth in the number of employees and the scope of
our operations as a result of internal growth and acquisitions. Such activities
could result in increased responsibilities for management.
Our future success will be highly dependent upon our ability to manage
successfully the expansion of operations. Our ability to manage and support our
growth effectively will be substantially dependent on our ability to implement
adequate improvements to financial, inventory, management controls, reporting,
union relationships, order entry systems and other procedures, and hire
sufficient numbers of financial, accounting, administrative, and management
personnel. There can be no assurance that we will be able to identify, attract,
and retain experienced accounting and financial personnel.
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Our future success depends on our ability to address potential market
opportunities and to manage expenses to match our ability to finance operations.
The need to control our expenses will place a significant strain on our
management and operational resources. If we are unable to control our expenses
effectively, our business, results of operations, and financial condition may be
adversely affected.
The unsuccessful integration of a business or business segment we acquire
could have a material adverse effect on our results.
As part of our business strategy, we expect to acquire assets and
businesses relating to or complementary to our operations. These acquisitions
will involve risks commonly encountered in acquisitions. These risks include,
among other things, exposure to unknown liabilities of the acquired companies,
additional acquisition costs and unanticipated expenses. Our quarterly and
annual operating results will fluctuate due to the costs and expenses of
acquiring and integrating new businesses. We may also experience difficulties in
assimilating the operations and personnel of acquired businesses. Our ongoing
business may be disrupted and our management's time and attention diverted from
existing operations. Our acquisition strategy will likely require additional
debt or equity financing, resulting in additional leverage or dilution of
ownership. We cannot assure you that any future acquisition will be consummated,
or that if consummated, that we will be able to integrate such acquisition
successfully.
Any reduction in government spending on defense could materially adversely
impact our revenues, results of operations and financial condition.
There are risks associated with programs that are subject to appropriation
by Congress, which could be potential targets for reductions in funding to pay
for other programs. Future reductions in United States Government spending on
defense or future changes in the kind of defense products required by United
States Government agencies could limit demand for our products, which would have
a materially adverse effect on our operating results and financial condition.
In addition, potential shifts in responsibilities and functions within the
defense and intelligence communities could result in a reduction of orders for
defense products by segments of the defense industry that have historically been
our major customers. As a result, demand for our products could decline,
resulting in a decrease in revenues and materially adversely affecting our
operating results and financial condition.
We depend on revenues from a few significant relationships, in particular
with Sikorsky Aircraft, and any loss, cancellation, reduction, or interruption
in these relationships could harm our business.
In general, we have derived a material portion of our revenue from one or
a limited number of customers. We expect that in future periods we may enter
into contracts with customers which represent a significant concentration of our
revenues. If such contracts were terminated, our revenues and net income could
significantly decline. Our success will depend on our continued ability to
develop and manage relationships with significant customers. Sikorsky accounts
for more than 40% of our sales. Any adverse change in our relationship with such
customer could have a material adverse effect on our business. Although we are
attempting to expand our customer base, we expect that our customer
concentration will not change significantly in the near future. The markets in
11
which we sell our products are dominated by a relatively small number of
customers who have contracts with United States governmental agencies, thereby
limiting the number of potential customers. We cannot be sure that we will be
able to retain our largest customers, that we will be able to attract additional
customers, or that our customers will continue to buy our products in the same
amounts as in prior years. The loss of one or more of our largest customers, any
reduction or interruption in sales to these customers, our inability to
successfully develop relationships with additional customers, or future price
concessions that we may have to make, could significantly harm our business.
Continued competition in our markets may lead to a reduction in our
revenues and market share.
The defense and aerospace component manufacturing market is highly
competitive and we expect that competition will continue to increase. Current
competitors have significantly greater technical, manufacturing, financial and
marketing resources than we do. We expect that more companies will enter the
defense and aerospace component manufacturing market. We may not be able to
compete successfully against either current or future competitors. Increased
competition could result in reduced revenue, lower margins, or loss of market
share, any of which could significantly harm our business.
Our future revenues are inherently unpredictable, our operating results
are likely to fluctuate from period to period, and if we fail to meet the
expectations of securities analysts or investors, our stock price could decline
significantly.
Our quarterly and annual operating results are likely to fluctuate
significantly in the future due to a variety of factors, some of which are
outside our control. Accordingly, we believe that period-to-period comparisons
of our results of operations are not meaningful and should not be relied upon as
indications of performance. Some of the factors that could cause quarterly or
annual operating results to fluctuate include conditions inherent in government
contracting and our business such as the timing of cost and expense recognition
for contracts, the United States Government contracting and budget cycles,
introduction of new government regulations and standards, contract closeouts,
variations in manufacturing efficiencies, our ability to obtain components and
subassemblies from contract manufacturers and suppliers, general economic
conditions, and economic conditions specific to the defense market. Because we
base our operating expenses on anticipated revenue trends and a high percentage
of our expenses are fixed in the short term, any delay in generating or
recognizing forecasted revenues could significantly harm our business.
Fluctuations in quarterly results, competition, or announcements of
extraordinary events such as acquisitions or litigation may cause earnings to
fall below the expectations of securities analysts and investors. In this event,
the trading price of our common stock could significantly decline. In addition,
there can be no assurance that an active trading market will be sustained for
our common stock. These fluctuations, as well as general economic and market
conditions, may adversely affect the future market price of our common stock, as
well as our overall operating results.
We may lose sales if our suppliers fail to meet our needs.
Although we procure most of our parts and components from multiple sources
or believe that these components are readily available from numerous sources,
certain components are available only from sole sources or from a limited number
or sources. While we believe that substitute components or assemblies could be
obtained, use of substitutes would require development of new suppliers or would
require us to re-engineer our products, or both, which could delay shipment of
our products and could have a materially adverse effect on our operating results
and financial condition.
Attracting and retaining key personnel is an essential element of our
future success.
12
Our future success depends to a significant extent upon the continued
service of our executive officers and other key management and technical
personnel and on our ability to continue to attract, retain and motivate
executive and other key employees, including those in managerial, technical,
marketing and information technology support positions. Attracting and retaining
skilled workers and qualified sales representatives is also critical to us.
Experienced management and technical, marketing and support personnel in the
defense and aerospace industries are in demand and competition for their talents
is intense. The loss of the services of one or more of our key employees or our
failure to attract, retain and motivate qualified personnel could have a
material adverse effect on our business, financial condition and results of
operations.
Terrorist acts and acts of war may seriously harm our business, results of
operations and financial condition.
United States and global responses to the Middle East conflict, terrorism,
perceived nuclear, biological and chemical threats and other global crises
increase uncertainties with respect to U.S. and other business and financial
markets. Several factors associated, directly or indirectly, with the Middle
East conflict, terrorism, perceived nuclear, biological and chemical threats and
other global crises and responses thereto, may adversely affect the Company.
While some of our products may experience greater demand as a result of
increased U.S. Government defense spending, various responses could realign U.S.
Government programs and affect the composition, funding or timing of our
government programs and those of our customers. U.S. Government spending could
shift to defense programs in which we do participate. As a result of the
September 11th terrorist attacks and given the current Middle East and global
situation, U.S. defense spending is generally expected to increase over the next
several years. Increased defense spending does not necessarily correlate to
increased business, because not all the programs in which we participate or have
current capabilities may be earmarked for increased funding.
Terrorist acts of war (wherever located around the world) may cause damage
or disruption to us, our employees, facilities, partners, suppliers,
distributors and resellers, and customers, which could significantly impact our
revenues, expenses and financial condition. The terrorist attacks that took
place in the United States on September 11, 2001 were unprecedented events that
have created many economic and political uncertainties. The potential for future
terrorist attacks, the national and international responses to terrorist
attacks, and other acts of war or hostility have created many economic and
political uncertainties, which could adversely affect our business and results
of operations in ways that cannot presently be predicted. In addition, as a
company with headquarters and significant operations located in the United
States, we may be impacted by actions against the United States.
The Company's indebtedness may affect its operations.
As described below under "Management's Discussion and Analysis or Plan of
Operation - Financial Liquidity and Capital Resources", AIM has incurred
significant indebtedness under the New Loan Facility. This indebtedness far
exceeds the amount of pre-Merger debt of AIM. As a result, AIM is significantly
leveraged and has indebtedness that is substantial in relation to its
stockholders' equity. The ability of AIM to make principal and interest payments
will depend on future performance, which is subject to many factors, some of
which are outside of the Company's control. In addition, the New Loan Facility
is secured by all of the assets of AIM including the real estate acquired in the
Real Estate Acquisition. In the case of a continuing default by AIM under the
13
New Loan Facility, the lender will have the right to foreclose on AIM's assets,
which would have a material adverse effect on the Company. Payment of principal
and interest on such indebtedness may limit the Company's ability to pay cash
dividends to shareholders and the documents governing the New Loan Facility will
prohibit the payment of cash dividends. The Company's leverage may also
adversely affect the ability of the Company to finance future operations and
capital needs, may limit its ability to pursue other business opportunities and
may make its results of operations more susceptible to adverse economic
conditions.
Need for Additional Capital
The Company may require additional capital to accomplish its business
objectives, even if the Maximum Offering is completed. There can be no assurance
that any financing will be available to the Company on favorable terms, if at
all. Further, there can be no assurance that the Company will be able to service
its existing indebtedness or any debt it may hereafter incur in connection with
the expansion of its operations. If the Company were to seek to raise additional
equity, its then existing shareholders would suffer dilution to their interests.
Absence of Principal Shareholders Guarantees and Financial Accommodations
Historically, AIM has obtained money and achieved other financial
accommodations through arrangements guaranteed by the AIM Shareholders. Since
they sold their shares of AIM in connection with the Acquisition, these original
AIM Shareholders will not be providing any financial assistance to us or AIM on
a going-forward basis. The Company is no longer able to rely upon the credit of
AIM's Shareholders when seeking to borrow money or obtain other financial
accommodations.
There is only a limited public market for the Company's securities.
There is no trading market for the Company's Preferred Stock. The trading
market for the Company's Common Stock is limited and there can be no assurance
that an active trading market will ever develop, or, if developed, that it will
be sustained.
Potential Adverse Effect on Market Price of Securities from Future Sales
of Common Stock
Within six months after the Closing Date, the Company is planning to
register for resale under the Securities Act approximately 46,339,955 shares of
Common Stock (in case the Maximum Offering is completed) which will either be
outstanding or be issuable upon conversion or exercise of preferred stock,
convertible notes or warrants. The Company also intends to register on Form S-8
under the Securities Act an additional 10,000,000 shares of Common Stock, which
are the shares available for issuance under the 2005 Stock Incentive Plan,
combined with the 4,850,000 shares underlying the stock options granted by Gales
Industries which have become options to purchase an equal number of shares of
our Common Stock. Among the outstanding shares of Common Stock which do not
carry registration rights, the shares of Common Stock held by the shareholders
of Ashlin prior to the Merger will be eligible for resale pursuant to Rule 144
under the Securities Act.
Future sales of Common Stock pursuant to a registration statement or under
Rule 144, or the perception that such sales could occur, could have an adverse
effect on the market price of the Common Stock. All of the shares of Common
Stock issuable upon conversion of the Preferred Stock have "piggyback"
registration rights. In addition, the Company expects to register under the
Securities Act all outstanding shares of Common Stock (whether issued in
connection with the Offering and the Closing Transactions or previously issued
14
to shareholders of the Company), and shares of Common Stock issuable upon
conversion or exercise of warrants and convertible securities, and, upon
effectiveness of a registration statement under the Securities Act with respect
to such shares, such shares will be immediately salable. Such sales will
adversely affect the market price of the Common Stock.
Effect of Stock Options
The Company intends to adopt a new stock incentive plan (the "2005 Stock
Incentive Plan") to be submitted to shareholders for approval, which would allow
for the issuance of a total of 5,150,000 shares of Common Stock, either as stock
grants or options, to employees, officers, directors, advisors and consultants
of the Company. As of the Closing Date, options to purchase 4,850,000 shares of
Gales' common stock became options to purchase shares of the Company's Common
Stock. The Company has approximately an additional 956,000 shares available for
issuance under its 1998 Stock Option Plan. A total of approximately 40,020
options are outstanding under the 1998 Stock Option Plan. The committee
administering the 2005 Stock Incentive Plan will have sole authority and
discretion to grant options under such Plan with respect to the 5,150,000 shares
available for issuance under such Plan. Options granted will be exercisable
during the period specified by the committee administering the 2005 Stock
Incentive Plan except that such committee may authorize options that will become
immediately exercisable in the event of a change in control of the Company and
in the event of certain mergers and reorganizations of the Company. The
existence of such options could limit the price that certain investors might be
willing to pay in the future for shares of Common Stock and may have the effect
of delaying or preventing a change in control of the Company. The issuance of
additional shares upon the exercise of such options could also decrease the
amount of earnings and assets available for distribution to the holders of the
Common Stock and could result in the dilution of voting power of the Common
Stock.
AIM has not been subject to Sarbanes-Oxley regulations and, therefore, may
lack the financial controls and procedures of public companies.
AIM has not had the internal or financial control infrastructure necessary
to meet the standards of a public company, including the requirements of the
Sarbanes Oxley Act of 2002. AIM was not subject to the Sarbanes Oxley Act of
2002, and its internal and financial controls reflect its status as a non-public
company. AIM has not had the internal infrastructure necessary to complete an
attestation about its financial controls that would be required under Section
404 of the Sarbanes Oxley Act of 2002. There can be no guarantee that there are
no significant deficiencies or material weaknesses in the quality of AIM's
financial controls. Because of the Merger, the Company will be required to
comply with Sarbanes Oxley, including standards for internal and financial
controls, in connection with AIM's operations. The cost to the Company of such
compliance could be substantial and could have a material adverse effect on the
Company's results of operations
2. Management's Discussion and Analysis or Plan of Operation.
Introduction
Following the Merger, AIM constitutes all of our operations. The following
discussion and analysis summarizes the significant factors affecting (1) AIM's
results of operations for fiscal 2004 compared to fiscal 2003 and (2) our
combined financial liquidity and capital resources. Also discussed below are
AIM's results of operations for the nine-month period ended September 30, 2005
compared with AIM's results of operations for the nine-month period ended
September 30, 2004. This discussion and analysis should be read in conjunction
with the financial statements and notes, and pro forma financial statements,
included with this report.
15
Each of Merger Sub, Gales Industries and Ashlin has had no sales revenue
but incurred expenses for the periods discussed herein. Merger Sub was formed in
October 2005 for the purpose of entering into the Merger and has no operating
history. Gales Industries was formed in October 2004 and, since then, has had no
operations except in connection with the Closing Transactions. Ashlin emerged
from bankruptcy protection on April 29, 2005 without any business operations and
after having divested the business in which it had been engaged prior to its
bankruptcy filing. Therefore, the results of operations for Ashlin from the
periods prior to its bankruptcy filing are not taken into account in the results
of operations for the combined entity.
Results of Operations
Year ended December 31, 2004 compared to year ended December 31, 2003
Net Sales. Net sales were $24,818,333 in fiscal 2004, compared to net
sales of $22,334,926 in fiscal 2003. The increase in net sales in fiscal 2004
compared to fiscal 2003 was due to increased shipments and increased purchase
orders.
Gross Profit. Gross profit was $3,182,580 in fiscal 2004 (12.8% of net
sales), compared to gross profit of $2,594,740 in fiscal 2003 (11.6% of net
sales). The increase was primarily due to an increased efficiency in
manufacturing and the implementation of cost reduction methods.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $1,712,202 in fiscal 2004, an increase of 7.6% from
selling, general and administrative expenses of $1,591,354 in fiscal 2003. The
increase was primarily due to adjustments in renumeration of officers' salaries,
pay increases to office personnel, increase in professional fees attributable to
legal costs in drafting a stockholders agreement among AIM's shareholders and
computer consulting costs in connection with modifications to AIM's IT network.
Other Expenses. Other expenses were $518,180 in fiscal 2004, an increase
of 46.0% from other expenses of $354,566 in fiscal 2003. The significant
increase was due to an increase in bank debt, the refinancing of existing
equipment loans, financing new equipment acquisitions and increased interest
rates.
The nine months ended September 30, 2005 compared to the nine months ended
September 30, 2004
Net Sales: Net sales were $21,851,532 in the nine months ended September
30, 2005 compared to net sales of $18,322,866 in the nine months ended September
30, 2004. The increase of $3,528,666 or 16.15% was primarily due to increased
purchase orders and shipments and retroactive price adjustments on long term
contracts. As of September 30, 2005, AIM's revenue backlog approximated $35
million.
Gross Profit: Gross profit was $2,801,366 in the nine months ended
September 30, 2005 (12.8% of net sales), compared to gross profit of $2,206,074
in the nine months ended September 30, 2004 (12.0% of net sales). The increase
in gross profit was due to the fact that, at June 30, 2004, a physical inventory
was taken as opposed to calculating inventory on a Gross Profit Percentage. That
physical inventory yielded a Gross Profit of 12%. At September 30, 2004, the
same Gross Profit Percentage was utilized and, at December 31, 2004 a physical
inventory yielded a Gross Profit Percentage of 12.89%. Absent a physical
inventory since December 31, 2004, this Gross Profit Percentage of 12.89% was
16
utilized for interim reporting purposes in 2005. The increase in gross profit as
a percentage of net sales in the nine months ended September 30, 2005 was
favorably affected by (i) renegotiated price adjustments on long term contracts
and (ii) increased efficiency in the manufacturing process. Our gross profit
margins were negatively affected in the nine months ended September 30, 2005 due
to (i) increase in factory repairs and (ii) increases in cost of labor.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $1,531,336 in the nine months ended September 30,
2005, an increase of 27% from selling, general and administrative expenses of
$1,205,521 in the nine months ended September 30, 2004. The increase was
primarily due to (i) an increase in professional fees and (ii) increase in fees
related to the implementation of a new computer software system.
Other Expenses: Other expenses were $411,493 in the nine months ended
September 30, 2005 compared to $316,791 in the nine months ended September 30,
2004, which increase was attributable to (i) financing of additional equipment
acquisitions and (ii) an increase in interest rates.
Impact of Inflation
Inflation has not had a material effect on our results of operations.
Financial Liquidity and Capital Resources
AIM has financed its operations and investments to date principally
through revenues from operations.
In connection with the Acquisition of AIM, we incurred notes payable
obligations in the aggregate principal amount of $1,627,262, of which $665,262
are in the form of convertible promissory notes which the Company may convert
into shares of Common Stock at $.40 per share upon effectiveness of a Securities
Act registration statement covering such shares. The remaining $962,000
principal amount note is repayable by the Company in 20 equal quarterly
installments of $48,100 principal plus interest. The holder of a convertible
bridge note in the principal amount of $22,500 has given notice that it will
convert such note into our Common Stock.
As of the Closing Date, under the New Loan Facility, we incurred
approximately $5,211,000 in debt under the revolving credit facility and
$3,500,000 under a term loan. AIM also has approximately $902,000 outstanding
under the equipment line of credit provided by the New Loan Facility. The
revolving credit facility requires us to pay interest monthly on the outstanding
principal amount. The term loan requires us to make 84 equal monthly payments of
$31,667 plus interest with the balance to be added to the 84th payment. We
believe that all of the applicable interest rates under the New Loan Facility
are consistent with prevailing interest rates in the lending industry.
All of the proceeds of the term loan and approximately $700,000 of the
borrowings under the revolving credit facility were used to complete the Real
Estate Acquisition. In addition, proceeds from the New Loan Facility were used
to pay off AIM's debt to its prior lender and will be used for working capital
for AIM's business.
As of the Closing Date, Gales Industries completed the first closing of
the Offering to accredited investors for gross proceeds of $6,793,280.
Commissions, management fees and non-accountable expense allowance which Gales
Industries paid to the placement agent amounted to an aggregate of $815,193.60.
We expect to receive at least $800,000 in additional gross proceeds from a
second closing of the Offering. The proceeds of the first closing of the
17
Offering, in general, were and will be used for paying the cash portion of the
purchase price for the Acquisition of AIM, for the repayment of $150,000 in note
obligations which Gales Industries incurred in bridge financings, for payment of
certain real estate taxes and accrued rent on AIM's real property, for expenses
of the Offering, Acquisition, Merger and related transactions, for satisfaction
of certain loans from the shareholders of AIM to AIM, and for working capital
for us and AIM.
The holders of Preferred Stock are entitled to receive payment-in-kind
dividends (payable in shares of Preferred Stock), prior to and in preference to
any declaration or payment of any dividend on the Common Stock, at the rate of
8% per annum. However, if a registration statement for the resale of the Common
Stock underlying the Preferred Stock is not filed within 45 days of the earlier
of the termination or the final closing of the Offering or declared effective
within six months of such earlier date, the dividend on the Preferred Stock will
be due in cash from the date of such default until the default is cured.
We expect that cash flows from operations will be sufficient to pay our
obligations as they arise. In addition, we will have available any net proceeds
from a second closing of the Offering. Further, we may be able to borrow
additional funds under our revolving credit facility provided that we have
sufficient inventory, receivables and equipment and machinery. However, we may
require additional working capital to expand our business and make acquisitions.
We anticipate that increased sales revenues will help to some extent, but we may
need to secure additional financing. In the event we are not able to increase
working capital, we may not be able to expand our business or make acquisitions.
Off Balance Sheet Arrangements
Not applicable.
Critical Accounting Policies
Our significant accounting policies are more fully described in Note 1 to
the audited financial statements of AIM. The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and the related
disclosures of contingent assets and liabilities. Actual results could differ
from those estimates under different assumptions or conditions.
Quantitative and Qualitative Disclosure about Market Risk
Our primary exposure to market risk consists of changes in interest rates
on borrowings under the New Loan Facility. An increase in interest rates would
adversely affect our operating results and the cash flow available after debt
service to fund operations. We manage exposure to interest rates fluctuations by
optimizing the use of fixed and variable rate debt. Except with respect to the
interest rates under the New Loan Facility, we do not have debts or hold
instruments that are sensitive to changes in interest rates, foreign currency
exchange rates or commodity prices.
3. Description of Property.
AIM's headquarters are situated on a 5.4-acre corporate campus in Bay
Shore, New York. On such campus, AIM occupies 3 buildings consisting of 76,000
square feet. Prior to the Closing Date, AIM leased such real property at an
annual rental fee of approximately $382,800 plus the cost of the annual real
estate tax on such property. The entities that owned the property prior to the
Closing Date are owned in whole or in part by affiliates of AIM. Simultaneously
18
with the closing of the Acquisition and the Merger, AIM became the owner of such
property pursuant to the Real Estate Acquisition with loans from the New Loan
Facility. As a consequence of such purchase, AIM is no longer required to pay
rent for the use of such property. It is estimated that at current rates the
interest payable each year on the funds used to acquire AIM's corporate campus
will approximate the rent which was being paid under the leases prior to their
termination.
Since the reorganization of Ashlin in January 2005, Ashlin's corporate
office has been located at 4400 North Federal Highway, Suite 210, Boca Raton,
Florida 33431. Ashlin's lease for this property expires on March 31, 2006 and
provides for a monthly rent of approximately $950. As a result of the Merger,
the Company's headquarters have been moved to AIM's corporate campus in Bay
Shore, New York.
4. Security Ownership
The following table sets forth information known to us regarding
beneficial ownership of our Common Stock as of the Closing Date by (i) each
person known by the Company to own beneficially more than 5% of the outstanding
Common Stock, (ii) each of our directors and executive officers, (iii) any other
"Named Executive Officer" identified in the Executive Compensation section,
below, and (iv) all of our officers and directors as a group. Except as
otherwise indicated, we believe based on information provided by each of the
individuals named in the table below that such individuals have sole investment
and voting power with respect to such shares, subject to community property
laws, where applicable. The address of each executive officer and director is
c/o the Company, 1479 Clinton Avenue, Bay Shore, NY 11706. The address of James
A. Brown is c/o the Company, 4400 North Federal Highway, Suite 210, Boca Raton,
Florida 33431.
Percentage of
Name Number of Shares Shares Outstanding
---- ---------------- ------------------
Michael A. Gales 4,326,219 (1) 29.4%
Louis A. Giusto 3,644,538 (2) 24.8%
Peter Rettaliata 1,100,000 (3) 7.1%
Dario Peragallo 1,100,000 (4) 7.1%
Seymour G. Siegel 100,000 *
Rounsevelle W. Schaum 100,000 *
Ira A. Hunt, Jr. 100,000 *
Stephen Nagler 145,455 (5) 1.0%
James A. Brown 676,268 4.7%
Luis Peragallo 253,214 1.7%
Jorge Peragallo 0 *
ACS Holdings, LLC 876,749 6.1%
All Directors and
Officers as a group, 9 persons (1)(2)(3)(4)(5) 66.6%
----------
* Less than 1%
19
(1) Of the options to purchase 1,250,000 shares of Common Stock granted to Mr.
Gales pursuant to his employment agreement, includes options vesting as of the
Closing Date exercisable into 250,000 shares of Common Stock.
(2) Of the options to purchase 1,200,000 shares of Common Stock granted to Mr.
Giusto pursuant to his employment agreement, includes options vesting as of the
Closing Date exercisable into 240,000 shares of Common Stock.
(3) Of the options to purchase 1,200,000 shares of Common Stock granted to Mr.
Rettaliata as of the Closing Date pursuant to his employment agreement, includes
options vesting as of the Closing Date exercisable into 150,000 shares of Common
Stock. Includes the 831,577 shares of Common Stock issuable upon conversion of
the $332,631 principal amount convertible note issued to Mr. Rettaliata in
connection with the Acquisition.
(4) Of the options to purchase 1,200,000 shares of Common Stock granted to Mr.
Dario Peragallo as of the Closing Date pursuant to his employment agreement,
includes options vesting as of the Closing Date exercisable into 150,000 shares
of Common Stock Includes the 831,577 shares of Common Stock issuable upon
conversion of the $332,631 principal amount convertible note issued to Dario
Peragallo in connection with the Acquisition. Does not include 253,214 shares of
Common Stock issued to Luis Peragallo pursuant to the terms of the Acquisition.
Luis Peragallo is the father of Dario Peragallo.
(5) Includes 45,455 shares of Common Stock issuable upon exercise of warrants
held by Mr. Nagler. Does not include 150,000 shares of Common Stock held by
Eaton & Van Winkle LLP, a firm of which Mr. Nagler is a partner.
5. Directors, Executive Officers, Promoters and Control Persons.
The following table sets forth information with respect to the directors
and executive officers of the Company as of the completion of the Merger.
Name of Individual Age Position with the Company
--------------------- --- ------------------------------------------------------
Michael A. Gales 60 Executive Chairman of the Board
Louis A. Giusto 63 Vice Chairman, Chief Financial Officer and Treasurer
Peter Rettaliata 55 Director, Chief Executive Officer and President of AIM
Dario Peragallo 41 Director and Executive Vice President, Manufacturing
Stephen M. Nagler 67 Director and Secretary
Seymour G. Siegel 62 Director
Rounsevelle W. Schaum 72 Director
Ira A. Hunt, Jr. 80 Director
James A. Brown 53 Director
The business experience of each director and executive officer of the Company is
set forth below.
Mr. Gales has thirty-two years experience in Corporate Finance, Mergers &
Acquisitions and corporate management of both publicly and privately held middle
market companies. Since 1992, Mr. Gales has been Chairman and President of Gales
& Company, a Wall Street M&A Advisory and Principal firm. From March 2003 to
present, Mr. Gales has concentrated his efforts on the formation of Gales
Industries, the Acquisition, and the development of Gales Industries' business
strategy, including the future expansion of the business of AIM. From September
2001 to March 2003, Mr. Gales concentrated on the operation of Gales & Company.
From 1997 to 2001, Mr. Gales served as the Managing Director of Corporate
20
Finance and Executive Vice President of Corporate Finance for Janssen-Meyers
Associates, LP and Andrew, Alexander, Wise & Company, Inc., respectively. Prior
to 1997, Mr. Gales served in senior management and executive roles principally
focused in heavy industries, including tenure as Principal, Co-Founder and
President of American United Corporation, an international maritime engineering
and technical systems group, and as President and Chief Operating Officer of
Aquaglobal, Inc., a manufacturer and marketer of desalination systems serving
customers such as Exxon, Shell, Mobil, Gulf and the U.S. Navy. Mr. Gales was the
founding Chairman and CEO of AquaSciences International, Inc., a publicly traded
organization engaged in the design and manufacture of water purification
systems, and the founding Chairman of lntersearch Group, Inc., a publicly traded
international HR consulting firm. In addition Mr. Gales has served as a Director
of ProtoSource Corporation, a publicly traded internet service provider. Mr.
Gales attended Oklahoma University and has been a member of various professional
associations including the Royal Institute of Marine Engineers (London), Society
of Naval Architects & Marine Engineers, Society of Piping Engineers & Designers,
The Investment Company Institute and the President's Association of the American
Management Association.
Louis A. Giusto has over 30 years of financial control experience with
foreign and domestic banks, non-bank financial service entities and consumer
product companies. Since 2003 in addition to his activities on behalf of Gales
Industries, Mr. Giusto has been acting as an independent consultant to a number
of private businesses. From 2000 to 2003, Mr. Giusto was an Account Manager for
a public accounting firm and the SVP Finance and Operations of Credit2B.com a
web-based internet company bringing to market advanced credit decisioning
platforms and sophisticated small business lending, insurance, securitization
and factoring products. Before joining C2B, Mr. Giusto served for fourteen years
in various positions with Fleet Bank and, prior to its acquisition by Fleet
Bank, NatWest PLC, London. During his tenure at NatWest, Mr. Giusto served as
Senior Financial Officer and Treasurer of NatWest Commercial Services, Inc. (a
billion dollar wholly owned subsidiary of NatWest PLC, London) and a Credit
Administrator (Risk Manager) with Fleet Bank. Mr. Giusto serves as a director of
Long Island Consultation Center, a not-for-profit psychiatric care facility in
Long Island, New York. Mr. Giusto graduated from New York University with a BS
in Economics and Accounting and from Long Island University (with Distinction)
with an MBA in Finance.
Mr. Rettaliata is the President of AIM and has served in such capacity
since 1994. Prior to his involvement at AIM, Mr. Rettaliata was employed by
Grumman Aerospace Corporation for twenty-two years. Professionally, Mr.
Rettaliata is the Chairman of "ADAPT", an organization of regional aerospace
companies, a past member of the Board of Governors of the Aerospace Industries
Association, and a member of the Executive Committee of the AIA Supplier
Council. Recently, Mr. Rettaliata testified to the President's Commission on
aerospace in Washington, D.C. He is a graduate of Niagara University where he
received a B.A. in History and the Harvard Business School where he completed
the PMD Program. Upon completion of the Acquisition, Mr. Rettaliata began
serving as corporate Chief Executive Officer and President of AIM, reporting to
the Executive Chairman of the Company. It is expected that he will be nominated
to the Executive and Management Committees of the Board.
Mr. Dario Peragallo is the Executive Vice President of AIM. Mr. Peragallo
has been associated with AIM for over 25 years. He was elevated in 2000 to
Director of Manufacturing. In addition, he has helped develop and maintain AIM's
current business systems. Mr. Peragallo has been the company "Lean Advocate"
since the inception of the program at AIM to decrease its inventory and increase
productivity. He has led AIM on its "Lean" course of evolution and has
participated in seventeen "Lean" events. Mr. Peragallo became Executive Vice
21
President with overall responsibility for engineering, manufacturing and
customer-critical technical matters (including "Lean" and "Supply Chain"
activities) in 2003. He has been an active member of Diversity Business since
2000, which is an organization specializing in the promotion of small and
minority owned businesses. He is a graduate of SUNY Farmingdale where he
received a B.A. in Manufacturing Engineering. Mr. Peragallo will oversee all
engineering and production matters relating to AIM.
Mr. Nagler is currently a member of Eaton & Van Winkle LLP, a law firm in
New York City which he joined as a Partner in October 2004. Prior to joining
Eaton & Van Winkle, Mr. Nagler was affiliated with Phillips Nizer LLP as Counsel
since 1995. Mr. Nagler chairs TriState Ventures LLC, an angel investor group in
the New York area. Mr. Nagler is a graduate of the City College of New York and
NYU School of Law. The firm of Eaton & Van Winkle LLP served as counsel to Gales
Industries and will be serving as counsel to the Company.
Mr. Siegel has been a principal in the Siegel Rich Division of Rothstein,
Kass & Company, P.C. since April 2000. Rothstein, Kass is a national firm of
accountants and consultants with approximately 520 members and offices in 6
cities. He specializes in providing strategic advice to business owners
including mergers acquisitions strategies; succession planning; capital
introductions and long range planning. In 1974, Mr. Siegel founded, and from
1974 to 1990, was managing partner of Siegel Rich and Co, P.C., CPAs. Siegel
Rich merged into M.R.Weiser & Co., LLC, a large regional firm where he had been
a senior partner. M.R. Weiser became a division of Rothstein, Kass in April
2000. Mr. Siegel has been a director, trustee and officer of numerous
businesses, philanthropic and civic organizations. He serves as a director and
audit committee chairman of Hauppauge Digital Inc., as well as Emerging Vision
Incorporated, and has served in a similar capacity at Oak Hall Capital Fund,
Prime Motor Inns Limited Partnership, Noise Cancellation Technologies and
Barpoint.com. It is expected that Mr. Siegel will serve as Chairman of the
Company's Audit Committee.
Since 1993, Mr. Schaum has served as Chairman of Newport Capital Partners,
a private investment banking and financial advisory firm specializing in
providing assistance to emerging growth companies in private placements,
corporate governance and negotiation of mergers and acquisitions. Mr. Schaum
also serves as a director and Chairman of the Audit Committee of the Quigley
Corporation (NASDAQ: "QGLY"); as Chairman of Mosaic Nutraceuticals, Inc. (OTC:
"MCNJ.PK"); and as a director of Camelot Entertainment Group, Inc (OTC:BB
"CMEG"); Intelligent Security Networks, Inc. (OTC: "ISNT.PK") and Turboworx,
Inc., a private firm specializing in high speed computation technologies. Mr.
Schaum was a founder, director and treasurer of Streaming Media Corporation, and
has also served as Chairman and CEO of BusinessNet Holdings Corporation; as a
crisis manager for Heller Financial Corporation; as Chairman of the California
Small Business Development Corporation, a private venture capital syndicate; and
was the founder and Managing Director of the Center of Management Sciences, a
consulting firm serving the aerospace industry. He has been a consultant on
project management procedures to the Departments of the Army, Navy and Air
Force, and numerous defense contractors, including General Dynamics,
MacDonald-Douglas, Raytheon, Hughes Aircraft and the Logistics Management
Institute. Mr. Schaum is a graduate of Phillips Andover Academy and holds a
Bachelor of Science degree in Mechanical Engineering from Stanford University
and an MBA degree from the Harvard Business School. He was also a member of the
faculty and Defense Research Staff of the Massachusetts Institute of Technology,
where he participated in the development of the computer programs for the
Ballistic Missile Early Warning System.
22
General Hunt graduated from the United States Military Academy in 1945 and
subsequently served thirty-three years in various command and staff positions in
the U.S. Army, retiring from active military service as a Major General in 1978.
His last military assignment was as Director of the Office of Battlefield
Systems Integration. Subsequently, General Hunt was president of Pacific
Architects and Engineers in Los Angeles and Vice President of Frank E. Basil,
Inc. in Washington, D.C. Since 1990, General Hunt has been a director of SafeNet
Inc. (Nasdaq: SFNT), an information security technology company. He is a Freeman
Scholar of the American Society of Civil Engineers and has a M.S. in Civil
Engineering from the Massachusetts Institute of Technology, a M.B.A. from the
University of Detroit; a Doctor of the University Degree from the University of
Grenoble, France and a Doctor of Business Administration Degree from the George
Washington University.
James A. Brown has been Ashlin's Chief Executive Officer and Secretary
since September 2004 and Chairman of the Board since May 2003. Ashlin filed for
bankruptcy protection while Mr. Brown was its Chairman and CEO. Mr. Brown served
as the Chief Operating Officer of Private Investor Reserves Corp., a financial
services firm, from May 2000 through 2004. Mr. Brown co-founded A.S.
Partners.com, Inc., an internet application service provider, and served as its
Chief Executive Officer from December 1998 to April 2000.
6. Executive Compensation.
The compensation information in the below table relates to Ashlin (after
its bankruptcy filing) and to AIM. Ashlin emerged from bankruptcy protection on
April 29, 2005 as a different entity from the entity that existed prior to the
bankruptcy filing, without any business operations and after having divested the
business in which it had been engaged prior to its bankruptcy filing. Therefore,
unless otherwise noted, the compensation information relating to Ashlin from the
periods prior to its bankruptcy filing are not reflected below but may be
obtained from the filings made by Ashlin (formerly known as Health & Nutrition
Systems International, Inc.) under the Securities Exchange Act of 1934, as
amended, available at the website maintained by the Securities and Exchange
Commission.
The following table shows for fiscal years ended December 31, 2004 and
2003, respectively, certain compensation awarded or paid to, or earned by, the
following persons (collectively, the "Named Executive Officers").
o Michael Gales, the Company's Executive Chairman;
o Peter Rettaliata, the Company's Chief Executive Officer;
o Dario Peragallo, the Company's Executive Vice President;
o Luis Peragallo, a former officer of AIM who is not employed by the
Company;
o Jorge Peragallo, a former officer of AIM who is not employed by the
Company; and
o James A. Brown, the chief executive officer of Ashlin from September 26,
2004 to the Closing Date.
Luis Peragallo is the father of Jorge Peragallo and Dario Peragallo. Other
than the Named Executive Officers, none of our executive officers earned more
than $100,000 in salary and bonus for the 2004 or 2003 fiscal years. Unless
otherwise indicated, we did not grant stock options or restricted stock to them
during the periods indicated.
23
Summary Compensation Table
Long Term
Annual Compensation Compensation
Fiscal Other Annual Securities Under
Name and Principal Position Year Salary($) Bonus($) Compensation($) Options Granted(#)
Michael Gales, 2004 $ -- $ -- $ -- --
Executive Chairman of the Company
2003 -- -- -- --
Peter Rettaliata, 2004 217,724 -- -- --
Chief Executive Officer of the Company
2003 219,182 -- -- --
Dario Peragallo, 2004 197,211 -- -- --
Executive Vice President of the Company
2003 151,666 -- -- --
Luis Peragallo, 2004 322,536 -- -- --
Former officer of AIM
2003 255,375 -- -- --
Jorge Peragallo, 2004 219,449 -- -- --
Former officer of AIM
2003 230,301 -- -- --
James A. Brown (1), 2004 27,817 -- -- --
Former Chief Executive Officer of Ashlin
2003 -- -- -- --
----------
(1) Prior to becoming Ashlin's chief executive officer, Mr. Brown received
approximately $59,000 in consulting fees in 2004 in consideration for his
services to Ashlin. As of August 13, 2003, Mr. Brown received 80,038
shares of Common Stock, valued at $10,000.
24
Incentive Plans
Prior to January 28, 2005, the effective date of Ashlin's Plan of
Reorganization, Ashlin had outstanding stock options under its 1998 Stock Option
Plan. As of January 28, 2005, all of Ashlin's outstanding options were
terminated pursuant to the Plan of Reorganization except options to purchase
40,018 shares of Common Stock held by Steven Pomerantz and options to purchase
4,002 shares of Common Stock held by Ted Alflen, both of whom served on the
Board of Directors of Ashlin following its emergence from bankruptcy proceedings
until the completion of the Merger.
Option Grants in Last Fiscal Year
In 2004, we did not grant to any of the Named Executive Officers options
to purchase shares of Common Stock.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
During 2004, none of the Named Executive Officers exercised any options to
purchase shares of Common Stock and, as of December 31, 2004, none of the Named
Executive Officers held any options to purchase shares of Common Stock.
Employment Agreements
The employment agreement of Michael A. Gales became effective as of the
Closing Date and will terminate five years thereafter, but will be extendable
for successive three one-year periods unless he or the Company decides not to
extend the agreement. Pursuant to his employment agreement, Mr. Gales will
receive a base salary at an annual rate of $250,000, which will increase a
minimum of 5% per year if operating profits of the Company have increased by at
least 5% over the preceding 12-month period. Mr. Gales will be entitled to an
annual bonus to be determined by the Company's Board of Directors. If he is
dismissed without cause, Mr. Gales would be entitled to receive salary and
benefits for the period which is the greater of the remaining term of his
employment agreement or one year. In addition, the Company granted to Mr. Gales,
upon the execution of his employment agreement, options to purchase 1,250,000
shares of Common Stock, exercisable over a ten-year period commencing on the
date of grant. The first one-fifth of such options vested as of the Closing Date
and the balance will vest in equal one-fifth increments (250,000 shares) on the
first through fourth anniversaries of September 15, 2005. The exercise price of
the options which vested as of the Closing Date is twenty-two cents ($0.22) per
share. The exercise price of the remaining options will be equal to the average
trading price of the Common Stock for a thirty-day period preceding the
respective vesting date, but will in no event be less than twenty-two cents per
share. Mr. Gales' employment agreement also contains restrictive covenants
prohibiting Mr. Gales (i) from directly or indirectly competing with the
Company, (ii) from soliciting any customer of the Company or AIM for any
competitive purposes and (iii) from employing or retaining any employee of the
Company or AIM or soliciting any such employee to become affiliated with any
entity other than the Company or AIM during the twelve-month period commencing
upon the termination of his agreement (the "Employee Restrictive Covenants").
25
The employment agreement of Louis A. Giusto became effective as of the
Closing Date, and will terminate five years thereafter, but will be extendable
for successive three one-year periods unless he or the Company decides not to
extend the agreement. Pursuant to his employment agreement, Mr. Giusto will
receive a base salary at an annual rate of $230,000 and such bonus compensation
as the Board of Directors may determine. The terms of Mr. Giusto's employment
agreement relating to annual increases in base salary and severance upon
termination are the same as those provided for in Mr. Gales' employment
agreement, the terms of which are set forth above. In addition, the Company
granted to Mr. Giusto, upon the execution of his employment agreement, options
to purchase 1,200,000 shares of Common Stock, exercisable over a ten-year period
commencing on the date of grant. The vesting schedule and exercise price
relating to Mr. Giusto's options are the same as those relating to Mr. Gales'
options set forth above. Mr. Giusto's employment agreement also contains the
Employee Restrictive Covenants.
The employment agreement of Peter Rettaliata became effective as of the
Closing Date, and will terminate five years thereafter, but will be extendable
for successive three one-year periods unless he or the Company decides not to
extend the agreement. Pursuant to his employment agreement, Mr. Rettaliata will
receive a base salary at an annual rate of $230,000 and such bonus compensation
as the Board of Directors may determine. The terms of Mr. Rettaliata's
employment agreement relating to annual increases in base salary and severance
upon termination are the same as those provided for in Mr. Gales' employment
agreement, the terms of which are set forth above. In addition, the Company
granted to Mr. Rettaliata, upon the execution of his employment agreement,
options to purchase 1,200,000 shares of Common Stock, exercisable over a
ten-year period commencing on the date of grant. The first one-eighth of such
options vested as of the Closing Date and the balance will vest in equal
one-eighth increments (150,000 shares) on the first through seventh
anniversaries of September 15, 2005. The exercise price of the shares which
vested as of the Closing Date is twenty-two cents ($0.22) per share. The
exercise price of the remaining options will be equal to the average trading
price of the Common Stock for a thirty-day period preceding the respective
vesting date, but will in no event be less than twenty-two cents per share. Mr.
Rettaliata's employment agreement also contains the Employee Restrictive
Covenants.
The employment agreement of Dario Peragallo became effective as of the
Closing Date, and will terminate five years thereafter, but will be extendable
for successive three one-year periods unless he or the Company decides not to
extend the agreement. Pursuant to his employment agreement, Mr. Peragallo will
receive a base salary at an annual rate of $230,000 and such bonus compensation
as the Board of Directors may determine. The terms of Mr. Peragallo's employment
agreement relating to annual increases in base salary and severance upon
termination are the same as those provided for in Mr. Gales' employment
agreement, the terms of which are set forth above. In addition, the Company
granted to Mr. Peragallo, upon the execution of his employment agreement,
options to purchase 1,200,000 shares of Common Stock, exercisable over a
ten-year period commencing on the date of grant. The vesting schedule and
exercise price relating to Mr. Peragallo's options are the same as those
relating to Mr. Rettaliata's options set forth above. Mr. Peragallo's employment
agreement also contains the Employee Restrictive Covenants.
The Company has agreed with the Placement Agent that the employment
agreements of the above-mentioned individuals will not be changed or amended
without the prior consent of the Placement Agent during the two year period
following the completion of the Offering and no further stock options will be
granted to such individuals during such time period without the prior consent of
the Placement Agent.
26
Pursuant to its Plan of Reorganization, Ashlin had entered into an
employment agreement with James A. Brown, its chairman and chief executive
officer. As a result of the Merger, such employment agreement was terminated and
Mr. Brown waived all of his rights under such employment agreement.
Director Compensation
As a result of the Merger, the Company intends to adopt a new director
compensation policy. The Company intends to provide compensation to each
non-employee director of the Company as follows: $10,000 per year and $1,250 per
Board meeting, and an additional 100,000 shares of Common Stock to each
non-employee director for his agreement to serve on the Board. The Company
intends to reimburse each director for expenses related to attending Board
meetings. The Company intends to pay an additional $3,000 per year to each
independent director serving as the chairman of the audit committee or the
compensation committee of the Board.
7. Certain Relationships and Related Transactions.
Transactions Relating to Ashlin:
In connection with its Plan of Reorganization, in January 2005, Ashlin
entered into an employment agreement with James A. Brown, Ashlin's Chief
Executive Officer, and disposed of substantially all of its assets to an entity
controlled by another former Chief Executive Officer of Ashlin. See "Description
of Business - Ashlin Bankruptcy", above.
Prior to becoming Ashlin's Chief Executive Officer, James A. Brown
received approximately $59,000 in consulting fees in 2004 in consideration for
his services to Ashlin. As of August 13, 2003, Mr. Brown received 80,003 shares
of Common Stock, valued at $10,000.
For more detailed information about Ashlin's related party transactions,
reference is made to the section titled "Certain Relationships and Related
Transactions" in Ashlin's Revised Definitive Proxy Statement on Schedule 14A,
filed with the Commission on July 20, 2005.
Transactions Relating to Gales Industries:
In August 2005, Mr. Stephen Nagler, one of the Company's directors, loaned
$10,000 to Gales Industries. Acquaintances of Mr. Nagler loaned an additional
$35,000 to Gales Industries in the same financing (the "$45,000 Financing"). In
connection with the $45,000 Financing, Gales Industries issued to such investors
12% convertible bridge notes (the "$45,000 Bridge Notes") in the aggregate
principal amount of $45,000. The $45,000 Bridge Notes were convertible into an
aggregate of 204,545 shares of Common Stock, at the conversion price of $0.22
per share, but were repaid with a portion of the proceeds of the Offering. In
connection with the $45,000 Bridge Notes, the Company also issued to the
investors warrants ("$45,000 Bridge Warrants") to purchase the number of shares
of Common Stock equal to the number of shares into which such $45,000 Bridge
Notes can be converted, exercisable at $0.22 per share. The $45,000 Bridge
Warrants allow for cashless exercise and have weighted-average anti-dilution
protection with respect to the exercise price.
27
Stephen Nagler is a partner of the law firm of Eaton & Van Winkle LLP,
which is counsel to Gales Industries and has been counsel to the Company since
the Closing Date. In October 2004, Gales Industries issued shares of its common
stock to Eaton & Van Winkle LLP and to Mr. Nagler in amounts such that, upon
cancellation of such shares in connection with the Merger, Eaton & Van Winkle
was issued 150,000 shares of Common Stock and Mr. Nagler, in connection with his
agreement to serve on the Company's Board, was issued 100,000 shares of Common
Stock.
Transactions Relating to AIM:
Prior to the Merger, AIM leased manufacturing and office space from KPK
Realty Corp. which, since October, 1974, has been owned 49% by Louis Peragallo,
an officer, a director and the largest shareholder of AIM prior to the Merger.
The annual rent for such lease was approximately $300,000 plus annual real
estate taxes on the leased property. Between 1989 and 1990, AIM advanced
$208,233 to KPK Realty Corp. In partial repayment of such advances from AIM,
rent in the amount of $22,992 in 2003, $127,737 in 2004 and $11,496 in 2005 was
offset by KPK Realty Corp. from the amounts due under such lease. In addition,
from 1990 to 2005, AIM was a guarantor of the mortgage (with a balance of
approximately $677,000 as of September 30, 2005) on such leased property. This
guaranty was terminated in connection with the Real Estate Acquisition.
Prior to the Merger, AIM leased manufacturing space at an annual rental of
approximately $82,800, plus annual real estate taxes on such property, from DPPR
Realty Corp. which, since January, 2003 has been 100% owned by Peter Rettaliata
and Dario Peragallo. Prior to the Merger, Messrs. Rettaliata and D. Peragallo
owned an aggregate of 36.84% of AIM's outstanding capital stock. Messrs.
Rettaliata and D. Peragallo were officers of AIM prior to the Merger and are
officers and directors of the Company. From February 2003 to November 30, 2005,
AIM was also a guarantor of the mortgage (with a balance of approximately
$567,000 as of September 30, 2005) on such leased property. This guaranty was
terminated in connection with the Real Estate Acquisition.
In December, 2002, Peter Rettaliata and Dario Peragallo purchased from AIM
for $257,058 an option to purchase DPPR Realty Corp. Subsequently, Mr.
Rettaliata and D. Peragallo purchased DPPR Realty Corp. and each now owns 50% of
DPPR Realty Corp.
In June, 1995, an individual who held 49% of the outstanding capital stock
of AIM sold such interest to Jorge Peragallo and Peter Rettaliata for cash and a
$625,000 principal amount promissory note from each of Mr. J. Peragallo and Mr.
Rettaliata ($1,250,000 in the aggregate). AIM guaranteed the repayment of these
promissory notes, which aggregated $1,250,000 in principal amount. These
promissory notes were repaid in full in June 2005.
Peter Retttaliata, who was an officer of AIM prior to the Closing Date,
advanced $5,000 to AIM during 2003 and $42,678 to AIM during 2004. Dario
Peragallo, who was an officer of AIM prior to the Closing Date, advanced $5,000
to AIM during 2003 and $39,334 to AIM during 2004. Luis Peragallo, who was an
officer of AIM prior to the Closing Date, advanced $5,000 to AIM during 2003 and
$18,179 to AIM during 2004. Jorge Peragallo, who was an officer of AIM prior to
the Closing Date, advanced $5,000 to AIM during 2003 and $38,344 to AIM during
2004. As of September 30, 2005, AIM had received an aggregate of $363,323 in
loans from its officers and was obligated to repay such amount to its officers.
Such amount was repaid in connection with the Acquisition. In October, 2005, AIM
agreed to pay an aggregate of $225,000 to its officers to enable them to pay
income taxes accrued while operating AIM as a Subchapter S corporation. Such
amount was paid in connection with the Acquisition.
28
Transactions Relating to the Acquisition and Other Related Transactions:
On the Closing Date, Gales Industries consummated the acquisition (the
"Acquisition") from Messrs. Luis Peragallo, Jorge Peragallo, Peter Rettaliata
and Dario Peragallo (the "AIM Shareholders"), of all of the outstanding capital
stock of AIM. Gales Industries had entered into a Stock Purchase Agreement with
AIM and the AIM Shareholders ("Acquisition Agreement") as of July 25, 2005. The
aggregate purchase price paid to the AIM Shareholders consisted of (i)
$3,114,296 in cash, (ii) $1,627,262 principal amount of promissory notes,
payable over five years, of which $962,000 were in the form of a secured
subordinated promissory note payable to Mr. Luis Peragallo and $665,262 were in
the form of unsecured convertible promissory notes ($332,631 payable to Mr.
Peter Rettaliata and $332,631 payable to Mr. Dario Peragallo), convertible into
shares of Common Stock at a price of $0.40 per share, and (iii) 490,060 shares
of newly issued Common Stock. The 490,060 shares of Common Stock issued to the
AIM Shareholders were allocated as follows: 253,214 shares to Luis Peragallo,
118,423 shares to Peter Rettaliata and 118,423 shares to Dario Peragallo. The
unsecured convertible promissory notes issued to Messrs. Rettaliata and D.
Peragallo will automatically be converted into Common Stock if the shares into
which such notes may be converted are registered under the Securities Act and
such registration has become effective. In addition to paying the cash portion
of the purchase price for the Acquisition, Gales Industries distributed
approximately $690,000 to the AIM Shareholders in satisfaction of certain loans
from them and to enable them to pay income taxes accrued while operating AIM as
a Subchapter S corporation.
The Acquisition Agreement provided that, upon completion of the
Acquisition, Gales Industries would pay up to $300,000 of legal and accounting
expenses incurred by the AIM Shareholders in connection with the Acquisition
Agreement. AIM paid $300,000 for such expenses in connection with the closing of
the Acquisition.
As of the Closing Date, the Company entered into employment agreements
with Messrs. Gales, Giusto, Rettaliata and D. Peragallo and issued stock options
to them. See "Executive Compensation - Employment Agreements", above.
As of the Closing Date, Acquisition Corp. completed the purchased from
entities which are owned, in part, by affiliates of AIM (KPK Realty Corp. and
DPPR Realty Corp.), for the aggregate purchase price $4,190,000, of the
properties, described above, which were being leased by AIM prior to the Closing
Date from such entities. The purchase price paid to KPK Realty Corp. was
$2,690,000 and the purchase price paid to DPPR Realty Corp. was $1,500,000.
Acquisition Corp. contemporaneously merged into AIM, with AIM being the
surviving entity, so that AIM became the owner of such properties.
8. Description of Securities.
As of August 24, 2005, our shareholders approved an amendment to our
Articles of Incorporation which increased the number of our authorized shares of
Common Stock, $.001 par value per share, from 30,000,000 to 150,000,000 shares,
and authorized 10,000,000 shares of "blank check" preferred stock, $.001 par
value per share. In connection with the Reverse Split, our total authorized
Common Stock was reduced to 120,055,746 shares and our total authorized
preferred stock was reduced to 8,003,716 shares.
29
Common Stock
The Company has a total of 120,055,746 shares of Common Stock, $.001 par
value authorized, of which approximately 14,469,797 shares were outstanding as
of the Closing Date.
The holders of Common Stock are entitled to receive dividends when and as
declared by the Board out of funds legally available therefore. Upon dissolution
of the Company, the holders of Common Stock are entitled to share, pro rata, in
the Company's net assets after payment of or provision for all debts and
liabilities of the Company, and after provision for any class of Preferred Stock
or other senior security which may be issued by the Company. Each share of
Common Stock is entitled to participate on a pro rata basis with each other
share of such stock in dividends and other distributions declared on shares of
Common Stock.
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders and may not cumulate their votes
for the election of directors. The holders of Common Stock do not have
preemptive rights to subscribe for additional shares of any class that may be
issued by the Company, and no share of Common Stock is entitled in any manner to
any preference over any other share of such stock.
Preferred Stock
The Company has authorized a total of 8,003,716 shares of "blank check"
preferred stock, $.001 par value, of which 1,000 shares have been designated
Series A Convertible Preferred Stock ("Preferred Stock").
In accordance with the Company's Articles of Incorporation, the Board of
Directors may, by resolution, issue additional preferred stock in one or more
series at such time or times and for such consideration as the Board of
Directors may determine. The Board of Directors is expressly authorized to
provide for such designations, preferences, voting power (or no voting power),
relative, participating, optional or other special rights and privileges as it
determines.
The Company has the power to issue additional preferred stock, or
different classes or series of preferred stock ranking senior to or on parity
with the Preferred Stock as to dividend rights or rights upon liquidation,
winding up, or dissolution, only with the approval or consent of at least a
majority of the then-outstanding shares of Preferred Stock.
The Company may issue additional preferred stock to effect a business
combination, to raise capital or for other reasons. In addition, additional
preferred stock could be utilized as a method of discouraging, delaying or
preventing a change in control of the Company.
The Series A Convertible Preferred Stock
The holders of Preferred Stock are entitled to receive payment-in-kind
dividends (payable in shares of Preferred Stock), prior to and in preference to
any declaration or payment of any dividend on the Common Stock, at the rate of
8% per annum. Dividends are cumulative and accrue if not paid. No dividends will
accrue on shares of Preferred Stock which are issued as a dividend. If a
registration statement for the resale by investors in the Offering of the Common
Stock underlying the Preferred Stock is not filed within 45 days of the earlier
of the termination or the final closing of the Offering or declared effective
within six months of such earlier date, the dividend on the Preferred Stock will
30
be paid in cash from the date of such default until the default is cured. Such
dividends will be paid until the Preferred Stock is converted into shares of
Common Stock. Fractional shares of Preferred Stock may be issued as a dividend
on the Preferred Stock. Each share of Preferred Stock will have a stated value
of $10,000 and such stated value will be the basis for calculating dividends on
the Preferred Stock. For example, one share of Preferred Stock will accrue a
dividend of .08 share of Preferred Stock per year or .02 share of Preferred
Stock per quarter and, if dividends are due in cash, will accrue a dividend of
$800 per year.
Subject to adjustment, each share of Preferred Stock is convertible at the
option of the holder at any time into 45,455 shares of Common Stock, at the
conversion price of $0.22 per share. The Preferred Stock will be automatically
converted into Common Stock, at the then applicable conversion rate, at such
time as the shares of Common Stock underlying the Preferred Stock have been
registered for resale under the Securities Act and the registration statement
with respect to such shares has been declared effective. Any fractional share of
Common Stock issuable upon conversion of any holder's Preferred Stock will be
rounded up to a whole share of Common Stock.
Without the approval of the holders of at least a majority of the
outstanding Preferred Stock voting together as a single class on an
as-if-converted to Common Stock basis, the Company will not take any action to
(i) alter, change or amend preferences, privileges or rights of the Preferred
Stock, (ii) redeem shares of Preferred Stock or Common Stock, (iii) pay or
declare any dividends (other than dividends on the Preferred Stock) or make any
other distributions on the Company's capital stock, or (iv) authorize, create
and/or issue capital stock with rights or privileges that are or superior to the
Preferred Stock.
The Preferred Stock has anti-dilution protection on a weighted-average
basis in the event of future issuances of Common Stock (or securities
convertible into Common Stock) at a price (or conversion price) below the price
at which the Preferred Stock may be converted into Common Stock, which is $0.22
per share. No such anti-dilution adjustment will be made in the case of the
issuance of (i) any shares or other securities in connection with any employee,
management or director stock option or incentive plans; (ii) any shares or other
securities in connection with any acquisition or merger transactions entered
into by the Company or its subsidiaries; (iii) any shares or other securities to
the Placement Agent; (iv) any shares of Common Stock issuable upon conversion of
the Preferred Stock; and (v) any shares or other securities outstanding as of
the Closing Date or to be outstanding upon conversion or exercise of such
securities.
The holders of the Preferred Stock do not have any voting rights on
matters with respect to which the holders of the Common Stock may vote until six
months after the earlier of the termination or the final closing of the
Offering, except that the holders of Preferred Stock may vote as a class with
respect to the protective provisions relating to the Preferred Stock, set forth
in the second preceding paragraph. After such six-month period, the holders of
the Preferred Stock will have voting rights as though their shares of Preferred
Stock were converted into Common Stock. In addition, the holders of Preferred
Stock will vote on an as-if-converted basis if the Company defaults in its
obligation to timely file a registration statement with respect to the Common
Stock into which the Preferred Stock is convertible and such default is
continuing.
The Company intends to promptly register for sale under the Securities Act
all shares of Common Stock issuable upon conversion of the Preferred Stock and
all shares of Preferred Stock which may be issued as dividends. In addition, the
holders of Preferred Stock will have two "piggyback" registration rights with
respect to the shares of Common Stock underlying the Preferred Stock, subject to
standard underwriter cutbacks. The holder of the Preferred Stock may transfer to
a transferee of Preferred Stock the registration rights with respect to the
Preferred Stock. The registration rights of any holder of Preferred Stock will
terminate at the earlier of (i) two years from the earlier of the termination or
31
the final closing of the Offering, or (ii) the date as of which all shares of
Common Stock underlying such holder's Preferred Stock can be sold in any
three-month period without volume restriction in compliance with Rule 144 under
the Securities Act. If a registration statement is not filed within 45 days of
the earlier of the termination or the final closing of the Offering or declared
effective within six months of such earlier date, the dividend on the Preferred
Stock is required to be paid in cash from the date of such default until the
default is cured.
In the event of any liquidation or winding up of the Company, the holders
of Preferred Stock will be entitled to receive, in preference to the holders of
Common Stock, an amount equal to two times the stated value of the Preferred
Stock, plus any dividends thereon ("Liquidation Payment"). Thereafter, the
remaining assets of the Company will be distributed ratably to the holders of
Common Stock. If the assets of the Company are insufficient to permit the full
payment of the Liquidation Payment, then the assets will be distributed pro rata
among the holders of the Preferred Stock.
9. Market Price of and Dividends on the Registrant's Common Equity and other
Shareholder Matters.
The Common Stock of the Company is quoted on the OTC Bulletin Board under
the trading symbol "ASHN" ("ASHD" prior to the Reverse Split). Prior to the
effectiveness of our Plan of Reorganization, our symbol was "HNNS". The prices
set forth below reflect the quarterly high and low bid information for shares of
our Common Stock during the last two fiscal years. These quotations reflect
inter-dealer prices, without retail markup, markdown or commission, and may not
represent actual transactions. There were no trades of our securities on the
OTCBB prior to October 4, 2000.
2005 Quarter Ended High Low
September 30, 2005 $0.15 $0.07
June 30, 2005 0.10 0.06
March 31, 2005 0.18 0.05
2004 Quarter Ended High Low
December 31, 2004 $0.07 $0.01
September 30, 2004 0.25 0.06
June 30, 2004 0.75 0.18
March 31, 2004 0.68 0.13
2003 Quarter Ended High Low
December 31, 2003 $0.53 $0.11
September 30, 2003 0.60 0.07
June 30, 2003 0.10 0.04
March 31, 2003 0.05 0.04
As of November 29, 2005, there were approximately 78 holders of record of
our Common Stock.
32
Our Common Stock is covered by an SEC rule that imposes additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors, which are generally
institutions with assets in excess of $5,000,000, or individuals with net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse. For transactions covered by the rule, the broker-dealer must
make a special suitability determination for the purchaser and transaction prior
to the sale. Consequently, the rule may affect the ability of broker-dealers to
sell our securities, and also may affect the ability of purchasers of our stock
to sell their shares in the secondary market. It may also cause fewer
broker-dealers to be willing to make a market in our common stock, and it may
affect the level of news coverage we receive.
Prior to June 29, 2000, we were not a reporting company and were not
required to file quarterly, annual, and other reports with the SEC.
We have not declared or paid any cash dividends on our Common Stock since
our inception, and our Board of Directors currently intends to retain all
earnings for use in the business for the foreseeable future. Any future payment
of dividends will depend upon our results of operations, financial condition,
cash requirements, and other factors deemed relevant by our Board of Directors.
Prior to the Merger, AIM was a Subchapter S corporation and made distributions
to its shareholders to enable them to pay income taxes on their allocable
portion of the Company's income.
Approximately 41,954,893 shares of Common Stock upon completion of the
initial closing of the Offering, and approximately 48,487,123 shares of Common
Stock in case the Maximum Offering is completed, are subject to issuance upon
exercise or conversion of outstanding options or warrants to purchase, or
securities convertible into, shares of Common Stock.
The following table provides information as of December 31, 2004 about our
Common Stock that would have been issued upon the exercise of options under our
1998 Stock Option Plan for employees, officers, directors, and independent
contractors. These obligations expired, unexercised, when the holders failed to
exercise their options.
(c)
(b) Number of securities
Weighted-average remaining available for
(a) future issuance future issuance under
Number of securities to under exercise price equity compensation
be issued upon exercise of outstanding plans (excluding
of outstanding options, options, warrants securities reflected in
Plan Category warrants and rights and rights column (a))
--------------------------------- ----------------------- -------------------- -----------------------
Equity compensation plans
approved by security holders (1) 485,395 $.54 515,007
--------------------------------- ----------------------- -------------------- -----------------------
Equity compensation plans not
approved by security holders (2)
--------------------------------- ----------------------- -------------------- -----------------------
Total (1) 485,395 $.54 515,007
================================= ======================= ==================== =======================
33
(1) All of the foregoing options, other than options exercisable for a total of
44,020 shares of our Common Stock which are vested in favor of Messrs. Alflen
and Pomerantz, terminated on January 28, 2005, the effective date of our Plan of
Reorganization. Therefore, as of January 28, 2005, approximately 956,000 shares
of Common Stock were remaining available for future issuance under our 1998
Stock Option Plan.
(2) Our 1998 Stock Option Plan has been approved by our shareholders. In
connection with the Merger, we adopted our 2005 Stock Incentive Plan, which has
not yet been approved by our shareholders, and issued stock options to our new
executive officers. See "Executive Compensation- Employment Agreements".
Registration Rights
Within six months after the Closing Date, the Company is planning to
register for resale under the Securities Act approximately 46,339,955 shares of
Common Stock (in case the Maximum Offering is completed) which will either be
outstanding or be issuable upon conversion or exercise of preferred stock,
convertible notes or warrants. The Company also intends to register on Form S-8
under the Securities Act an additional 10,000,000 shares of Common Stock, which
are the shares available for issuance under the 2005 Stock Incentive Plan,
combined with the 4,850,000 shares underlying the stock options granted by Gales
Industries which have become options to purchase an equal number of shares of
our Common Stock. Among the outstanding shares of Common Stock which do not
carry registration rights, the shares of Common Stock held by the shareholders
of Ashlin prior to the Merger will be eligible for resale pursuant to Rule 144
under the Securities Act.
10. Legal Proceedings.
A legal action seeking $5,000,000 has been brought against AIM by an
independent contractor for personal injury allegedly caused by a fall in AIM's
premises. AIM has insurance coverage in the amount of $4,000,000. At a
settlement mediation, the plaintiff made a demand of $2,000,000. The Company
believes that any liability accruing to AIM in this case will not exceed the
insurance coverage maintained by AIM for personal injury.
Ashlin was involved in litigation with J.C. Herbert Bryant, III, a former
officer, director and shareholders of Ashlin, and KMS-Thin Tab 100, Inc., which
was settled in September 2002. As part of the settlement, we entered into a
distribution agreement with Mr. Bryant, beginning on September 26, 2002 and
ending on September 25, 2007, permitting Mr. Bryant to purchase certain products
from us and to exclusively distribute those products in Florida from Orlando
south. In October 2003, we terminated the distribution agreement with KMS based
on KMS's breach of material terms of the agreement. On December 1, 2003, we
filed suit against KMS-Thin Tab 100, Inc. in the Palm Beach County Circuit Court
(Case No. 2003CA012757XXCDAN) for breach of contract, trademark infringement and
34
for a declaration of rights that the distribution agreement is terminated and of
no further force and effect. KMS answered the complaint and filed its own
counterclaim for fraud in the inducement, trademark infringement, dilution and
fraudulent misrepresentation; the fraud-based counterclaims were dismissed with
prejudice by the Court on summary judgment. KMS subsequently amended its
counterclaim to allege a breach of contract under the distribution agreement. In
January 2005, the State Court in Florida ruled that neither party should
prevail, and rejected a request for attorney's fees by KMS-Thin Tab 100 Inc.,
thus adjudicating the matter. KMS-Thin Tab 100 Inc. subsequently filed a notice
of appeal.
Subsequently, on July 29, 2005, the 4th District Court of Appeals granted
the Company's motion to dismiss the appeal by KMS-Thin Tab 100 Inc. The Company
is not aware of any other outstanding litigation.
11. Changes in and Disagreements With Accountants.
Not Applicable.
12. Recent Sales of Unregistered Securities.
Shares Issued By Gales Industries and In Connection With the Acquisition:
As of October 28, 2004, immediately after its incorporation, Gales
Industries issued 4,401,219 shares of its common stock to its founder and
Executive Chairman and 3,404,538 shares of its common stock to its founder and
Vice Chairman for nominal consideration. As of the same date, Gales Industries
issued 100,000 shares of its common stock to each of the Company's non-employee
directors in consideration for service on the Board through 2006. As of the same
date, Gales Industries issued 150,000 shares of its common stock to a law firm
and 100,000 shares of its common stock to another law firm in consideration for
legal services. As of the same date, in consideration for services, Gales
Industried issued in the name of a consultant 250,000 shares of its common
stock, of which 75,000 shares were deemed to be delivered to the consultant as
of the Closing Date. 175,000 of such 250,000 shares of common stock were issued
in consideration of past consulting services to Gales Industries and the 75,000
additional shares of common stock were issued in partial consideration of M&A
and related services to be provided to the Company during the one-year period
following the completion of the Offering.
Gales Industries entered into an Investment Banking/Advisory Agreement
("Atlas Agreement"), dated as of January 11, 2005, with Atlas Capital Services,
LLC ("Atlas"). The Atlas Agreement provided that Atlas would receive newly
issued shares equal to 4% of a publicly-held company introduced by Atlas to
Gales Industries, provided that Gales Industries enters into a reverse merger
transaction with such company. Immediately prior to the closing of the Merger,
Gales Industries issued to various designees of Atlas an aggregate of 1,477,230
shares of its common stock in satisfaction of such obligation to Atlas.
In connection with the Acquisition of AIM, Gales Industries issued
$332,631 principal amount convertible note to each of Mr. Rettaliata and D.
Peragallo. Each such convertible note is convertible into shares of Common Stock
at the conversion price of $0.40 per share. Also, in connection with the
Acquisition of AIM, Gales Industries issued shares of its common stock which,
pursuant to the Merger, have become 253,214 shares of Common Stock in the name
of Luis Peragallo, 118,423 shares of Common Stock in the name of Peter
Rettaliata and 118,423 shares of Common Stock to Dario Peragallo. See "Certain
Relationships and Related Transactions - Transactions Relating to the
Acquisition and Other Related Transactions."
35
In February 2005, Gales Industries, in consideration for an investment of
$22,500, issued to the investor a convertible promissory note in the principal
amount of $22,500 convertible at the price of $0.11 per share into shares of
Common Stock. The holder of this note has given us notice to convert such note
into shares of Common Stock. For no additional consideration, Gales Industries
issued a warrant to the investor to purchase 409,091 shares of Common Stock at
the per share exercise price equal to 50% of the per share conversion price of
the convertible note issued to such investor.
In August 2005, Gales Industries, in consideration for $45,000 in
aggregate investment, issued to the investors convertible promissory notes in
the aggregate principal amount of $45,000, convertible at the price of $0.22 per
share of Common Stock. These notes have been repaid. For no additional
consideration, Gales Industries issued to such investors warrants to purchase
the number of shares of Common Stock equal to the number of shares into which
the $45,000 Bridge Note can be converted (204,545), exercisable at $0.22 per
share. See "Certain Relationships and Related Transactions - Transactions
Relating to Gales Industries."
In September 2005, Gales Industries received $105,000 in financing from
investors (the "$105,000 Financing") and, in connection therewith, issued to
such investors warrants to purchase an aggregate of 477,273 of shares of Common
Stock at a price of $0.22 per share. The Placement Agent served as agent in the
$105,000 Financing and received compensation upon the same terms as provided in
the Offering.
As of the Closing Date, Gales Industries issued to its officers stock
options to purchase shares of common stock as follows: 1,250,000 options to Mr.
Gales, and 1,200,000 options each to Mr. Giusto, Rettaliata and D. Peragallo.
See "Executive Compensation - Employment Agreements."
Shares Issued by the Company in Connection with the Merger and the
Offering:
As of the Closing Date, pursuant to the Merger, the shareholders of Gales
Industries were issued an aggregate of 10,645,817 shares of our Common Stock by
the Company. In addition, 100,000 shares of Common Stock were issued by the
Company as of the Closing Date to Mr. James A. Brown in consideration for his
agreement to serve on the Board. As part of the Merger, the other non-employee
directors of the Company also received 100,000 shares of Common Stock in
exchange for their 100,000 shares of Gales Industries common stock.
As of the Closing Date, in connection with the Offering and the Merger,
679.328 shares of Gales Industries Series A Convertible Preferred Stock were
exchanged for the same number of shares of Preferred Stock of the Company. Each
share of Preferred Stock is convertible into 45,455 shares of Common Stock.
Such 679.328 shares of Preferred Stock (not including shares of Preferred
Stock issuable as dividends) are convertible into an aggregate of 30,878,855
shares of our Common Stock. In connection with the Offering, the Placement Agent
was issued the Placement Agent Warrants. See "Summary" above.
The $22,500 convertible bridge note issued by Gales Industries in February
2005 has been converted by its holder and, in connection therewith, the Company
will issue to the holder 204,545 shares of Common Stock plus the number of
shares equal to 12% interest accrued on such note for approximately 10 months,
divided by the $0.11 conversion price of such note.
36
Shares Issued by Ashlin:
On July 30, 2003, Ashlin issued to two Board members an aggregate of
approximately 160,075 shares of Common Stock in return for services performed.
The fair value of such shares of Common Stock was recorded as $24,000 in the
aggregate.
As of September 16, 2005, Ashlin issued approximately 80,038 shares of
Common Stock to a consultant in return for consulting services.
As of January 2005, as part of the Plan of Reorganization, Ashlin issued
approximately 240,112 shares of Common Stock to James Brown (Ashlin's chairman
and chief executive officer) upon Ashlin's emergence from bankruptcy protection.
The fair value of such shares was recorded as $12,000 in the aggregate. In March
2005, the Company issued approximately 256,119 shares of Common Stock to Mr.
Brown. The fair value of such 256,119 shares was determined to be $32,000 in the
aggregate. On August 13, 2003, Ashlin issued approximately 80,038 shares of
Common Stock to Mr. Brown in consideration of his services as a director of
Ashlin.
In March 2005, Ashlin issued approximately 80,038 shares of Common Stock
to Global Business Resources, Inc., a Fort Lauderdale based consulting firm, as
partial compensation for services to Ashlin.
During each of the years ended December 31, 2004 and 2003, options to
purchase approximately 40,019 shares of Common Stock were granted to the chief
executive officer of Ashlin.
Other than such sales of shares and the securities issued in connection
with the Merger and the Offering described above, during the past three years,
Gales Industries and Ashlin did not sell any securities which were not
registered under the Securities Act. We believe that the issuances in connection
with such sales, the Merger and the Offering were exempt from registration under
Section 4(2) of the Securities Act.
13. Indemnification of Directors and Officers.
Our certificate of incorporation and by-laws provide that we will
indemnify to the fullest extent permitted by law any person made or threatened
to be made a party to any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person or such
person's testator or intestate is or was a director, officer or employee of our
company or serves or served at our request as a director, officer or employee of
another corporation or entity.
We may enter into agreements to indemnify our directors and officers, in
addition to the indemnification provided for in our articles of incorporation
and by-laws. These agreements, among other things, would indemnify our directors
and officers for certain expenses (including advancing expenses for attorneys'
fees), judgments, fines and settlement amounts incurred by any such person in
any action or proceeding, including any action by us or in our right, arising
out of such person's services as a director or officer of our Company, any
37
subsidiary of ours or any other company or enterprise to which the person
provides services at our request. In addition, we have received a commitment for
insurance providing indemnification for our directors and officers for certain
liabilities and believe that the effective date of such insurance will be
retroactive to the closing of the Merger. We believe that these indemnification
provisions and agreements and related insurance are necessary to attract and
retain qualified directors and officers.
Insofar as indemnification for liabilities arising under the Securities
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
Item 9.01. FINANCIAL STATEMENTS AND EXHIBITS
(a) and (b) The financial statements of AIM, for the periods and the dates
indicated, are filed with this report. AIM's statement of operations for the
fiscal years ended December 31, 2004 and 2003 and its balance sheet data as of
December 31, 2004 and December 31, 2003 are set forth below . Also filed with
this report are (i) AIM's balance sheet as of September 30, 2005 and statements
of operations and cash flows for the nine month periods ended September 30, 2005
and 2004, and (ii) pro forma consolidated balance sheet of the Company, as of
September 30, 2005 and the pro forma consolidated statements of operations for
the nine months ended September 30, 2005 and the year end December 31, 2004, as
if the business combination had occurred on January 1, 2004.
(c) Exhibits
The Company hereby agrees to provide to the Commission upon request any
omitted schedules or exhibits to the documents listed in this Item 9.01.
Exhibit Nos.
------------
2.1 Debtor's Amended Plan of Reorganization (incorporated by
reference to Exhibit 2.1 of Registrant's Form 8-K, filed
January 14, 2005, Commission File Number 000-29245).
2.2 Merger Agreement, dated as of November 14, 2005, among Gales
Industries Incorporated, two of its stockholders, Gales
Industries Merger Sub, Inc., and Ashlin Development
Corporation (incorporated herein by reference to Exhibit 10.1
of Registrant's Form 8-K report filed November 21, 2005).
3.1 Amended and Restated Articles of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 of
Registrant's Form 8-K report, filed November 28, 2005).
3.2 By-Laws of the Registrant (incorporated by reference to
Exhibit 3.2 of the Registrant's registration statement on Form
10-SB, filed on January 31, 2000; Commission File Number
000-29245).
3.3 Amendment to the Restated By-Laws of the Registrant dated
September 25, 2000 (incorporated by reference to Exhibit 3.3
of the Registrant's annual report on Form 10-KSB, filed on
April 16, 2000; Commission File Number 000-29245).
3.4 Amendment to the Restated By-Laws of the Registrant dated
November 10, 2000 (incorporated by reference to Exhibit 3.4 of
the Registrant's annual report on Form 10-KSB, filed on April
16, 2000; Commission File Number 000-29245).
38
Exhibit Nos.
------------
4.1 Convertible Promissory Note, dated November 30, 2005, in the
amount of $332,631, from Gales Industries Incorporated (and
assumed by the Registrant) to Peter Rettaliata.
4.2 Convertible Promissory Note, dated November 30, 2005, in the
amount of $332,631, from Gales Industries Incorporated (and
assumed by the Registrant) to Dario Peragallo.
4.3 Form of Warrant to be issued by the Registrant to GunnAllen
Financial, Inc. after completion of the Offering.
4.4 [Intentionally left blank.]
4.5 Form of Warrant issued by Gales Industries Incorporated (and
assumed by the Registrant) to investors in the $45,000 Bridge
Financing in or about August 2005.
4.6 Form of Warrant issued by Gales Industries Incorporated (and
assumed by the Registrant) to investors in the $105,000 Bridge
Financing in or about September, 2005.
10.1 Asset Purchase Agreement between the Registrant and TeeZee,
Inc. dated October 15, 2004 (incorporated by reference to
Exhibit 2 to Exhibit 2.1 of the Registrant's Report of Form
8-K, filed on January 14, 2005; Commission File Number
000-29245).
10.2 Stock Purchase Agreement, dated as of July 25, 2005, by and
among Gales Industries Incorporated, Air Industries Machining,
Corp., Luis Peragallo, Jorge Peragallo, Peter Rettaliata and
Dario Peragallo.
10.3 Secured Subordinated Promissory Note, dated November 30, 2005,
in the amount of $962,000, from Gales Industries Incorporated
(and assumed by the Registrant) to Luis Peragallo.
10.4 Security Agreement, dated as of November 30, 2005, by and
between Gales Industries Incorporated (and assumed by the
Registrant) and Luis Peragallo.
10.5 Contract of Sale, dated as of November 7, 2005, by and between
DPPR Realty Corp. and Gales Industries Incorporated for the
purchase of the property known as 1480 North Clinton Avenue,
Bay Shore, NY.
10.6 Contract of Sale, dated as of November 7, 2005, by and between
KPK Realty Corp. and Gales Industries Incorporated for the
purchase of the property known as 1460 North Fifth Avenue and
1479 North Clinton Avenue, Bay Shore, NY.
10.7 Employment Agreement, dated as of September 26, 2005, by and
between Gales Industries Incorporated (and assumed by the
Registrant) and Michael A. Gales.
10.8 Employment Agreement, dated as of September 26, 2005, by and
between Louis A. Giusto and Gales Industries Incorporated (and
assumed by the Registrant).
10.9 Employment Agreement, dated as of September 26, 2005, by and
among Gales Industries Incorporated (and assumed by the
Registrant), Air Industries Machining, Corp. and Peter D.
Rettaliata.
10.10 Employment Agreement, dated as of September 26, 2005, by and
among Gales Industries Incorporated (and assumed by the
Registrant), Air Industries Machining, Corp. and Dario
Peragallo.
10.11 [Intentionally left blank.]
10.12 [Intentionally left blank.]
10.13 Registrant's 1998 Stock Option Plan (incorporated by reference
to Exhibit 10.18 of the Registrant's annual report on Form
10-KSB, filed April 12, 2002; Commission File Number
000-29245)
39
Exhibit Nos.
------------
10.14 2005 Stock Incentive Plan of Gales Industries Incorporated.
10.15 Stock Option Agreement, dated as of September 26, 2005, by
Gales Industries Incorporated (and assumed by the Registrant)
with Michael A. Gales.
10.16 Stock Option Agreement, dated as of September 26, 2005, by
Gales Industries Incorporated (and assumed by the Registrant)
with Louis A. Giusto.
10.17 Stock Option Agreement, dated as of September 26, 2005, by
Gales Industries Incorporated (and assumed by the Registrant)
with Peter Rettaliata.
10.18 Stock Option Agreement, dated as of September 26, 2005, by
Gales Industries Incorporated (and assumed by the Registrant)
with Dario Peragallo.
10.19 Revolving Credit, Term Loan, Equipment Line and Security
Agreement, dated as of November 30, 2005, by and between Air
Industries Machining, Corp., PNC Bank, National Association,
as Lender, and PNC Bank, National Association, as Agent.
10.20 Mortgage and Security Agreement, dated as of November 30,
2005, by and between Air Industries Machining, Corp. and PNC
Bank.
10.21 Long Term Agreement, dated as of August 18, 2000, between Air
Industries Machining, Corp. and Sikorsky Aircraft Corporation.
10.22 Long Term Agreement, dated as of September 7, 2000, between
Air Industries Machining, Corp. and Sikorsky Aircraft
Corporation.
21.1 List of Subsidiaries.
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Current Report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: December 5, 2005
ASHLIN DEVELOPMENT CORPORATION
By: /s/ Michael A. Gales
------------------------------------
Michael A. Gales, Executive Chairman
41
AIR INDUSTRIES MACHINING CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 2004
AIR INDUSTRIES MACHINING CORPORATION
Table of Contents
December 31, 2004
PAGES
Auditors' Report 1
Comparative Balance Sheets 2-3
Comparative Statements of Income and Retained Earnings 4
Comparative Statements of Cash Flows 5-6
Notes to Financial Statements 7-11
Supplementary Information:
Comparative Schedules of Expenses 12-13
1
Independent Auditors' Report
To the Board of Directors and Stockholders of
Air Industries Machining Corporation
We have audited the accompanying Comparative Balance Sheets of Air
Industries Machining Corporation as of December 31, 2004 and December 31, 2003,
and the related Statements of Income and Retained Earnings and Cash Flows for
each of the years then ended. These financial statements are the responsibility
of the Air Industries Machining Corporation management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Air Industries Machining
Corporation as of December 31, 2004 and December 31, 2003, and the results of
its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information included in
the accompanying comparative schedules of manufacturing overhead, selling,
general and administrative expenses, is presented for purposes of additional
analysis and is not a required part of the basic financial statements. Such
information has not been subjected to the auditing procedures applied in the
audit of the basic financial statements and, accordingly, we express no opinion
on it.
Respectfully submitted,
BILDNER & GIANNASCO, LLP
Certified Public Accountants
Jericho, New York
February 21, 2005
2
AIR INDUSTRIES MACHINING CORPORATION
Comparative Balance Sheets
DECEMBER 31, DECEMBER 31,
ASSETS 2004 2003
------------ ------------
CURRENT ASSETS
Cash and Cash Equivalents - See Contra $ 10,308 $ --
Accounts Receivable 2,643,536 1,200,806
Inventory 11,108,456 9,873,378
Advanced Rental -- 26,917
Prepaid Expenses 132,268 183,475
Other Current Assets 4,979 29,913
Miscellaneous Receivable 31,278 31,278
Deposits 37,160 --
Advances to Affiliates 11,496 22,992
----------- -----------
TOTAL CURRENT ASSETS $13,979,481 $11,368,759
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Machinery and Equipment $ 7,987,665 $ 7,639,875
Tools and Instruments 29,803 29,803
Leasehold Improvements 489,328 418,431
Automotive Equipment 290,083 284,205
Furniture and Fixtures 700,801 647,666
----------- -----------
$ 9,497,680 $ 9,019,980
Less: Accumulated Depreciation 8,002,260 7,578,836
----------- -----------
PROPERTY, PLANT AND EQUIPMENT - NET $ 1,495,420 $ 1,441,144
----------- -----------
DEFERRED CHARGES AND OTHER ASSETS
Security Deposits $ 25,122 $ 25,122
Cash Value Officer's Life 263,636 211,927
Unamortized Finance Costs 63,843 97,336
Organization Expenses 500 500
Advances to Affiliates -- 116,241
----------- -----------
TOTAL DEFERRED CHARGES AND OTHER ASSETS $ 353,101 $ 451,126
----------- -----------
TOTAL ASSETS $15,828,002 $13,261,029
=========== ===========
The accompanying audit report and notes are an integral
part of these statements.
3
AIR INDUSTRIES MACHINING CORPORATION
Comparative Balance Sheets
LIABILITIES AND DECEMBER 31, DECEMBER 31,
STOCKHOLDERS' EQUITY 2004 2003
------------ ------------
CURRENT LIABILITIES
Cash Overdraft $ -- $ 227,094
Accounts Payable 3,851,264 2,814,860
Advance Payment - Customer 1,354,266 771,616
Notes Payable - Equipment 309,054 206,464
Leases Payable - Equipment 75,889 118,916
Notes Payable - Insurance 109,581 93,842
Accrued Operating Expenses 390,270 207,168
------------ ------------
TOTAL CURRENT LIABILITIES $ 6,090,324 $ 4,439,960
------------ ------------
LONG-TERM LIABILITIES
Notes Payable - Officer $ 271,381 $ 132,846
Notes Payable - Banks 5,280,000 4,900,000
Notes Payable - Equipment 318,817 348,052
Leases Payable - Equipment 15,536 69,116
TOTAL LONG-TERM LIABILITIES $ 5,885,734 $ 5,450,014
------------ ------------
TOTAL LIABILITIES $ 11,976,058 $ 9,889,974
------------ ------------
STOCKHOLDERS' EQUITY
Capital Stock - 200 Shares Authorized
No Par Value, 95 Shares Issued $ 32,223 $ 32,223
Additional Paid-In Capital 172,628 172,628
Retained Earnings (Deficit) 3,743,093 3,262,204
Treasury Stock (96,000) (96,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 3,851,944 $ 3,371,055
------------ ------------
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 15,828,002 $ 13,261,029
============ ============
The accompanying audit report and notes are an integral
part of these statements.
4
AIR INDUSTRIES MACHINING CORPORATION
Comparative Statements of Income and Retained Earnings
FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
2004 2003
------------ ------------
NET INCOME FROM SALES $ 24,818,333 $ 22,334,926
------------ ------------
COST OF GOODS SOLD
Inventory, Beginning $ 9,873,378 $ 8,732,250
Purchases 3,882,760 3,158,067
Sub-Contracting 3,767,089 3,255,278
Finishing 2,531,021 2,351,400
Hardware 1,908,026 1,824,376
Direct Labor 2,280,036 2,150,533
Overhead 8,501,899 8,141,660
------------ ------------
$ 32,744,209 $ 29,613,564
Less: Inventory, Ending 11,108,456 9,873,378
------------ ------------
COST OF GOODS SOLD $ 21,635,753 $ 19,740,186
------------ ------------
GROSS PROFIT $ 3,182,580 $ 2,594,740
OTHER INCOME 2,573 100
------------ ------------
TOTAL INCOME $ 3,185,153 $ 2,594,840
------------ ------------
EXPENSES
Selling $ 321,727 $ 309,479
General and Administrative 1,390,475 1,281,875
Interest and Amortization 517,511 354,466
Franchise Tax 669 100
------------ ------------
TOTAL EXPENSES $ 2,230,382 $ 1,945,920
------------ ------------
NET INCOME FOR YEAR $ 954,771 $ 648,920
RETAINED EARNINGS, BEGINNING OF YEAR 3,262,204 2,889,919
Deduct: Distribution to Shareholders (473,882) (276,635)
------------ ------------
RETAINED EARNINGS, END OF YEAR $ 3,743,093 $ 3,262,204
============ ============
The accompanying audit report and notes are an integral
part of these statements.
5
AIR INDUSTRIES MACHINING CORPORATION
Comparative Statements of Cash Flows
FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income for Year $ 954,771 $ 648,920
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 474,917 520,239
Changes in Assets and Liabilities:
(Increase) Decrease In -
Accounts Receivable (1,442,730) 59,922
Inventory (1,235,078) (1,141,128)
Advanced Rental 26,917 (26,917)
Prepaid Expenses 51,207 87,021
Other Current Assets 24,934 29,304
Lease Assignment Receivable -- 257,058
Miscellaneous Receivable -- (5,487)
Deposits (37,160) --
Cash Value Officer's Life (51,709) (75,807)
Increase (Decrease) In -
Accounts Payable 1,036,404 508,263
Advanced Payment - Customer 582,650 79,722
Accrued Operating Costs 183,102 (39,428)
----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES (Forward) $ 568,225 $ 901,682
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Equipment $ (477,700) $ (139,652)
----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES (Forward) $ (477,700) $ (139,652)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in Bank Debt $ 380,000 $ (500,000)
(Increase) in Deposits -- (5,400)
Increase (Decrease) in Notes Payable Equipment 73,355 (177,335)
(Decrease) in Lease Payable Equipment (96,607) (161,195)
Increase (Decrease) in Notes Payable - Insurance 15,739 (96,351)
Decrease in Advances to Affiliates 127,737 22,992
Increase in Notes Payable - Officer 138,535 7,439
Additional Finance Cost Incurred (18,000) (109,581)
Distribution to Shareholders (473,882) (276,635)
----------- -----------
CASH FLOWS PROVIDED (USED) BY
FINANCING ACTIVITIES (Forward) $ 146,877 $(1,296,066)
----------- -----------
The accompanying audit report and notes are an integral
part of these statements.
6
AIR INDUSTRIES MACHINING CORPORATION
Comparative Statements of Cash Flows
Continued
FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
2004 2003
------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES (Forward) $ 568,225 $ 901,682
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES (Forward) $ (477,700) $ (139,652)
----------- -----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (Forward) $ 146,877 $(1,296,066)
----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $ 237,402 $ (534,036)
CASH AND CASH EQUIVALENTS,
(OVERDRAFT) BEGINNING OF YEAR (227,094) 306,942
----------- -----------
CASH AND CASH EQUIVALENTS (OVERDRAFT),
END OF YEAR $ 10,308 $ (227,094)
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 468,081 $ 331,128
----------- -----------
Income Taxes Paid $ 669 $ 100
----------- -----------
The accompanying audit report and notes are an integral
part of these statements.
7
AIR INDUSTRIES MACHINING CORPORATION
Notes to Financial Statements
December 31, 2004
1- SIGNIFICANT ACCOUNTING POLICIES
Background of Company
The Company was incorporated in the State of New York and maintains
its principal place of business in Bay Shore, New York. The
Corporation is primarily engaged in machining parts for the
aerospace industry. Its customer base is primarily publicly traded
companies.
Cash Equivalents
Cash equivalents include all highly liquid debt instruments with an
original maturity of three months or less. Cash equivalents consist
primarily of money market accounts.
Accounts Receivable
Management has elected to record bad debts using the direct
write-off method. Generally accepted accounting principles require
that the allowance method be used to reflect bad debts. However, the
effect of the use of the direct write-off method is not materially
different from the results that would have been obtained had the
allowance method been followed. Additionally, the major customers of
the Company are publicly traded companies of substantial size and
sizeable net worth.
Inventories
Inventories used in determining Cost of Goods Sold are stated at the
lower of cost or market.
Plant, Property and Equipment
Fixed assets are carried at cost. Major additions and betterments
are charged to the property accounts while maintenance and repairs
are charged against income in the year incurred. Assets retired, or
otherwise disposed of, are eliminated from the property accounts and
the related amounts of depreciation are eliminated from the
accumulated depreciation accounts. Gains or losses from dispositions
are included in income.
Depreciation
Depreciation is provided for in amounts sufficient to allocate the
cost of depreciable assets to operations over their estimated useful
lives using the straight-line and declining balance methods.
8
1- SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
Finance Costs
Costs connected with obtaining and executing debt arrangements are
capitalized and amortized on the straight-line basis over the term
of the related debt.
Tax Status
The Company, with the consent of its stockholders, elected under the
Internal Revenue Code and New York State law to be taxed as an "S"
corporation. In lieu of corporate income taxes, the stockholders are
taxed on their proportionate share of the company's net income.
Accordingly, no provision or liability for federal income taxes has
been made in the accompanying financial statements.
2- INVENTORIES
At December 31, 2004, inventories consisted of the following:
Raw Materials $ 760,613
Work in Progress 6,993,962
Finished Goods 2,164,629
Assembly 190,363
Hardware 998,889
-----------
$11,108,456
===========
3- RELATED PARTY TRANSACTIONS
The following transactions occurred between the Company and certain
related parties.
The Company presently leases manufacturing and office space from KPK
Realty Corp. (see Note 8), in which 49% ownership rests with a major
stockholder of the Company. The total monies advanced KPK Realty
Corp. amounted to $208,233. The Company is being repaid in the form
of a rent offset in the amount of $22,992 per year. See Note 8 for
details concerning the ownership of KPK Realty Corp. and the
guaranty by the Corporation of a debt between the present minority
shareholders and the former majority shareholder of the Corporation.
Additionally, the Company leases manufacturing space from DPPR
Realty Corp. (see Note 8), which is 100% owned by two of the
shareholders of the Corporation who in the aggregate own 36.84% of
the Company.
9
4- NOTES PAYABLE - BANKS
The Company has negotiated a credit facility dated August of 2003
with a major lending institution. The facility is secured by a first
priority interest in all accounts receivable, inventory and
equipment presently owned or hereafter acquired by the Company. The
indebtedness bears interest at the rate of 1/2 percent above the
prime rate of interest or a libor margin of 3%.
The terms of the facility require, among other things, the Company
to maintain certain financial ratios and levels of working capital,
which are set forth below: These financial ratios and levels of
working capital have been amended as of 5/14/04.
Minimum Tangible Net Worth
Closing Date -
12/31/03 - 12/30/04 $3,250,000
12/31/04 - 12/30/05 3,400,000
12/31/05 - Termination Date 3,800,000
Maximum Leverage
Closing Date -
12/31/03 - 12/30/04 3.00:1
12/31/04 - 12/30/05 2.80:1
12/31/05 - Termination Date 2.50:1
Working Capital
Closing Date - Termination Date $ 900,000
For the purpose of calculating the ratios, Prepaid Expenses are
considered to be a non-current asset and advances to KPK Realty
Corp. are considered to be an intangible asset. Notes Payable to
Bank are deemed to be current liabilities.
Tangible Net Worth, as defined in the loan agreement, amounted to
$4,047,486. The covenant for minimum Tangible Net Worth calls for
$3,400,000.
Working Capital, as defined in the loan agreement, amounted to
$2,574,974. The covenant for Working Capital calls for a minimum of
$900,000.
10
4- NOTES PAYABLE - BANKS (Continued)
The maximum leverage ratio, as defined in the loan agreement is
2.80. As of the Balance Sheet date, the maximum leverage ratio
amounted 2.89.
The loans are guaranteed jointly and severally by the principals of
the Company, as well as the affiliated companies KPK Realty
Corporation and DPPR Realty Corp.
Except as amended, all other terms and conditions of the agreement
remained unchanged and continue in full force and effect.
As of the Balance Sheet date the Company is in violation of certain
financial covenants that had been negotiated with the lending
institution, specifically, the minimum leverage ratio requirement.
The Company has requested a waiver of this covenant from the lending
institution and in fact has been granted such a waiver.
5- NOTES PAYABLE-OFFICER
Notes Payable-Officer in the amount of $271,381 has been
subordinated in favor of the lending institution.
6- NOTES PAYABLE-EQUIPMENT
The Company has financed the purchase of various equipment which is
secured by the related equipment. As of the Balance Sheet date, the
balance was $627,871, of which $309,053 is reflected as current.
Payments covering the remaining years are as follows:
2005 $ 309,053
2006 195,098
2007 99,734
2008 23,985
7- LEASE PAYABLE-EQUIPMENT
The Company has entered into various capital lease agreements
consisting of various types of manufacturing equipment, including
computer equipment. Payments covering the remaining years are as
follows:
2005 $ 75,889
2006 15,536
11
8- COMMITMENTS AND CONTINGENCIES
The Company presently leases manufacturing and office facilities
under a lease expiring June 30, 2005, at an annual rental of
$300,000, plus annual real estate tax payable by the lessee.
This lease is between the Company and KPK Realty Corp., a
corporation in which 49% is owned by the majority stockholder of the
Company. Additionally, the Company is a guarantor of the mortgage on
the leased premises. The present balance of that mortgage is
approximately $736,000.
The Company also leases manufacturing facilities pursuant to a lease
expiring in 2014 at an annual rental of $82,800, plus annual real
estate tax payable by the lessee. This lease is between the Company
and DPPR Realty Corporation, a corporation owned by the stockholders
of the Corporation. Additionally, the Company is a guarantor of the
mortgage on the leased premises. The present balance of that
mortgage is approximately $587,786.
Additionally, the Company is a guarantor on an obligation to a
former shareholder that had a 49% equity position in the
Corporation. The former shareholder sold his stock and the amount
still owing on the original obligation of $1,250,000 to the former
shareholder by the current shareholders is presently $81,828.
A legal action has been brought against the Company for personal
injury sustained by an independent contractor caused by a fall on
the premises of the Company in the amount of $5,000,000. This action
is scheduled for trial in June of 2005. The Company has insurance
coverage in the amount of $4,000,000. At a settlement mediation,
plaintiff made a demand of $2,000,000. In the opinion of counsel
representing the Company the full value of the case would be well
within the insurance coverage maintained by the Company.
SUPPLEMENTARY INFORMATON
12
AIR INDUSTRIES MACHINING CORPORATION
Comparative Schedules of Expenses
FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
2004 2003
------------ ------------
MANUFACTURING OVERHEAD
Material, Tools and Supplies $ 759,319 $ 760,416
Equipment Rental 33,729 133,448
Premium Pay 306,196 286,889
Sick Pay/Vacation Pay 131,153 132,988
Holiday Pay 50,744 57,307
Rent 456,917 440,861
Light and Power 278,254 261,586
Factory Maintenance 313,005 290,725
Depreciation and Amortization 349,114 427,261
Employee Benefits 169,708 173,330
Payroll Taxes 552,969 508,429
Insurance 239,018 265,299
Group Insurance 1,144,381 1,004,279
Indirect Payroll 3,717,392 3,398,842
---------- ----------
TOTAL MANUFACTURING OVERHEAD $8,501,899 $8,141,660
========== ==========
SELLING EXPENSES
Field Engineer $ 13,643 $ 16,494
Shipping Supplies 107,507 106,930
Meetings and Conferences 20,628 19,407
Automotive Expenses 52,983 49,255
Freight Out 108,187 103,440
Depreciation - Automotive Equipment 18,779 13,953
---------- ----------
TOTAL SELLING EXPENSES $ 321,727 $ 309,479
========== ==========
The accompanying audit report and notes are an integral
part of these statements.
13
AIR INDUSTRIES MACHINING CORPORATION
Comparative Schedules of Expenses
FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
2004 2003
------------ ------------
GENERAL AND ADMINISTRATIVE EXPENSES
Officers' Salaries $ 499,675 $ 467,358
Office Salaries 256,846 228,634
Rent 74,382 71,768
Telephone 52,487 73,743
Light and Power 45,297 53,486
Payroll Taxes 40,917 37,011
Employee Benefits 7,800 8,996
Professional Fees 173,369 149,785
Office Expenses 34,412 34,429
Depreciation - Furniture and Fixtures 55,531 66,843
Sundry 9,524 9,259
Premiums - Officers' Life Insurance 26,621 13,650
Donations 3,200 360
Payroll Processing & Computer Costs 110,414 66,553
---------- ----------
TOTAL GENERAL & ADMINISTRATIVE EXPENSES $1,390,475 $1,281,875
========== ==========
The accompanying audit report and notes are an integral
part of these statements.
AIR INDUSTRIES MACHINING CORPORATION
FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
AIR INDUSTRIES MACHINING CORPORATION
Table of Contents
September 30, 2005
PAGES
Accountants' Report 1
Comparative Balance Sheets 2-3
Comparative Statements of Income and Retained Earnings 4
Comparative Statements of Cash Flows 5-6
Notes to Financial Statements 7-11
Supplementary Information:
Comparative Schedules of Expenses 12-13
1
Independent Accountants' Report
To the Board of Directors and Stockholders of
Air Industries Machining Corporation
We have reviewed the unaudited comparative Balance Sheets of Air
Industries Machining Corporation at September 30, 2005 and September 30, 2004,
the related unaudited Statements of Income and Retained Earnings and Cash Flows
for the nine months ended September 30, 2005 and September 30, 2004. This
financial information is the responsibility of the company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an examination in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial information for it to be in
conformity with generally accepted accounting principles in the United States.
Our review was made for the purpose of expressing limited assurance that
there are no material modifications that should be made to the financial
statements in order for them to be in conformity with generally accepted
accounting principles in the United States. The supplementary information
included in the accompanying comparative schedules of manufacturing overhead,
selling, general and administrative expenses, is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. Such information has not been subjected to the inquiry and
analytical procedures applied in the review of the basic financial statements,
but were compiled from information that is the representation of management,
without audit or review. Accordingly, we do not express an opinion or any other
form of assurance on the supplementary information.
Respectfully submitted,
BILDNER & GIANNASCO, LLP
Certified Public Accountants
Jericho, New York
November 21, 2005
2
AIR INDUSTRIES MACHINING CORPORATION
Comparative Balance Sheets
SEPTEMBER 30, SEPTEMBER 30,
ASSETS 2005 2004
------------- -------------
CURRENT ASSETS
Cash and Cash Equivalents $ 238,727 $ 196,651
Accounts Receivable 2,269,778 1,839,605
Inventory 12,034,369 9,940,195
Prepaid Expenses 76,709 75,204
Other Current Assets 4,864 48,120
Advances to Affiliates -- 22,993
----------- -----------
TOTAL CURRENT ASSETS $14,624,447 $12,122,768
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Machinery and Equipment $ 8,541,083 $ 7,984,165
Tools and Instruments 29,803 29,803
Leasehold Improvements 505,171 489,328
Automotive Equipment 290,083 289,558
Furniture and Fixtures 872,112 699,662
----------- -----------
$10,238,252 $ 9,492,516
Less: Accumulated Depreciation 8,319,631 7,959,880
----------- -----------
PROPERTY, PLANT AND EQUIPMENT - NET $ 1,918,621 $ 1,532,636
----------- -----------
DEFERRED CHARGES AND OTHER ASSETS
Security Deposits $ 41,122 $ 25,122
Cash Value Officer's Life 52,334 211,927
Unamortized Finance Costs 33,483 68,465
Organization Expenses 500 500
Advances to Affiliates -- 98,995
----------- -----------
TOTAL DEFERRED CHARGES AND OTHER ASSETS $ 127,439 $ 405,009
----------- -----------
TOTAL ASSETS $16,670,507 $14,060,413
=========== ===========
The accompanying review report and notes are an integral
part of these statements.
3
AIR INDUSTRIES MACHINING CORPORATION
Comparative Balance Sheets
LIABILITIES AND SEPTEMBER 30, SEPTEMBER 30,
STOCKHOLDERS' EQUITY 2005 2004
------------ ------------
CURRENT LIABILITIES
Accounts Payable $ 4,137,723 $ 3,142,994
Advance Payment - Customer 667,772 554,420
Notes Payable - Equipment 67,116 303,792
Leases Payable - Equipment 346,184 76,697
Notes Payable - Insurance 31,567 32,368
Accrued Operating Expenses 554,056 288,837
------------ ------------
TOTAL CURRENT LIABILITIES $ 5,804,418 $ 4,399,108
------------ ------------
LONG-TERM LIABILITIES
Notes Payable - Officer $ 363,323 $ 191,308
Notes Payable - Banks 5,180,000 5,180,000
Notes Payable - Equipment 9,845 398,267
Leases Payable - Equipment 902,233 35,172
------------ ------------
TOTAL LONG-TERM LIABILITIES $ 6,455,401 $ 5,804,747
------------ ------------
TOTAL LIABILITIES $ 12,259,819 $ 10,203,855
------------ ------------
STOCKHOLDERS' EQUITY
Capital Stock - 200 Shares Authorized
No Par Value, 95 Shares Issued $ 32,223 $ 32,223
Additional Paid-In Capital 172,628 172,628
Retained Earnings 4,301,837 3,747,707
Treasury Stock (96,000) (96,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 4,410,688 $ 3,856,558
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 16,670,507 $ 14,060,413
============ ============
The accompanying review report and notes are an integral
part of these statements.
4
AIR INDUSTRIES MACHINING CORPORATION
Comparative Statements of Income and Retained Earnings
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------ ------------
NET INCOME FROM SALES $ 21,851,532 $ 18,322,866
------------ ------------
COST OF GOODS SOLD
Inventory, Beginning $ 11,108,456 $ 9,873,378
Purchases 3,382,443 2,671,821
Sub-Contracting 2,858,473 2,464,205
Finishing 2,158,583 1,809,386
Hardware 1,896,726 1,476,452
Direct Labor 2,072,801 1,650,157
Overhead 7,607,053 6,111,588
------------ ------------
$ 31,084,535 $ 26,056,987
Less: Inventory, Ending 12,034,369 9,940,195
------------ ------------
COST OF GOODS SOLD $ 19,050,166 $ 16,116,792
------------ ------------
GROSS PROFIT $ 2,801,366 $ 2,206,074
OTHER INCOME 152 752
------------ ------------
TOTAL INCOME $ 2,801,518 $ 2,206,826
------------ ------------
EXPENSES
Selling $ 244,125 $ 224,542
General and Administrative 1,287,211 980,979
Interest and Amortization 411,493 316,791
Franchise Tax 516 669
------------ ------------
TOTAL EXPENSES $ 1,943,345 $ 1,522,981
------------ ------------
NET INCOME FOR PERIOD $ 858,173 $ 683,845
RETAINED EARNINGS, BEGINNING OF PERIOD 3,743,093 3,262,204
Deduct: Distribution to Shareholders (299,429) (198,342)
------------ ------------
RETAINED EARNINGS, END OF PERIOD $ 4,301,837 $ 3,747,707
============ ============
The accompanying review report and notes are an integral
part of these statements.
5
AIR INDUSTRIES MACHINING CORPORATION
Comparative Statements of Cash Flows
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income for Period $ 858,173 $ 683,845
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 347,732 427,915
Changes in Assets and Liabilities:
(Increase) Decrease In -
Accounts Receivable 373,757 (638,799)
Inventory (925,913) (66,817)
Advanced Rental -- 26,917
Prepaid Expenses 55,559 108,271
Other Current Assets 115 (18,207)
Miscellaneous Receivable 31,278 31,278
Deposits 21,160 --
Cash Value Officers Life 211,302 --
Increase (Decrease) In -
Accounts Payable 286,459 328,134
Advanced Payment - Customer (686,494) (217,196)
Accrued Operating Costs 163,786 81,669
--------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES (Forward) $ 736,914 $ 747,010
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Equipment $(740,572) $(472,536)
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES (Forward) $(740,572) $(472,536)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in Bank Debt $(100,000) $ 280,000
Increase (Decrease) in Notes Payable Equipment (550,910) 147,543
Increase (Decrease) in Lease Payable Equipment 1,156,992 (76,163)
Decrease in Notes Payable - Insurance (78,014) (61,474)
Decrease in Advances to Affiliates 11,496 17,245
Increase in Notes Payable - Officer 91,942 58,462
Additional Finance Costs Incurred -- (18,000)
Distribution to Shareholders (299,429) (198,342)
--------- ---------
CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES (Forward) $ 232,077 $ 149,271
--------- ---------
The accompanying review report and notes are an integral
part of these statements.
6
AIR INDUSTRIES MACHINING CORPORATION
Comparative Statements of Cash Flows
Continued
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- -------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES (Forward) $ 736,914 $ 747,010
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES (Forward) $(740,572) $(472,536)
--------- ---------
NET CASH PROVIDED BY
FINANCING ACTIVITIES (Forward) $ 232,077 $ 149,271
--------- ---------
NET INCREASE IN CASH
AND CASH EQUIVALENTS $ 228,419 $ 423,745
CASH AND CASH EQUIVALENTS,
(OVERDRAFT) BEGINNING OF PERIOD 10,308 (227,094)
--------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 238,727 $ 196,651
========= =========
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 369,772 $ 267,361
--------- ---------
Income Taxes Paid $ 516 $ 669
--------- ---------
The accompanying review report and notes are an integral
part of these statements.
7
AIR INDUSTRIES MACHINING CORPORATION
Notes to Financial Statements
September 30, 2005
1- SIGNIFICANT ACCOUNTING POLICIES
Background of Company
The Company was incorporated in the State of New York and maintains
its principal place of business in Bay Shore, New York. The
Corporation is primarily engaged in machining parts for the
aerospace industry. Its customer base is primarily publicly traded
companies.
Cash Equivalents
Cash equivalents include all highly liquid debt instruments with an
original maturity of three months or less. Cash equivalents consist
primarily of money market accounts.
Accounts Receivable
Management has elected to record bad debts using the direct
write-off method. Generally accepted accounting principles require
that the allowance method be used to reflect bad debts. However, the
effect of the use of the direct write-off method is not materially
different from the results that would have been obtained had the
allowance method been followed. Additionally, the major customers of
the Company are publicly traded companies of substantial size and
sizeable net worth.
Inventories
Inventories used in determining Cost of Goods Sold are stated at the
lower of cost or market.
Plant, Property and Equipment
Fixed assets are carried at cost. Major additions and betterments
are charged to the property accounts while maintenance and repairs
are charged against income in the year incurred. Assets retired, or
otherwise disposed of, are eliminated from the property accounts and
the related amounts of depreciation are eliminated from the
accumulated depreciation accounts. Gains or losses from dispositions
are included in income.
Depreciation
Depreciation is provided for in amounts sufficient to allocate the
cost of depreciable assets to operations over their estimated useful
lives using the straight-line and declining balance methods.
8
1- SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
Finance Costs
Costs connected with obtaining and executing debt arrangements are
capitalized and amortized on the straight-line basis over the term
of the related debt.
Tax Status
The Company, with the consent of its stockholders, elected under the
Internal Revenue Code and New York State law to be taxed as an "S"
corporation. In lieu of corporate income taxes, the stockholders are
taxed on their proportionate share of the company's net income.
Accordingly, no provision or liability for federal income taxes has
been made in the accompanying financial statements.
2- INVENTORIES
For interim reporting purposes management estimates were provided in
arriving at inventories. Management arrived at these estimates by
utilizing the gross profit percentage method by analyzing the
purchase of raw materials and other direct costs incurred for the
period and by estimating the stage of completion of work in process.
3- RELATED PARTY TRANSACTIONS
The following transactions occurred between the Company and certain
related parties.
The Company presently leases manufacturing and office space from KPK
Realty Corp. (see Note 8), in which 49% ownership rests with a major
stockholder of the Company. The total monies advanced KPK Realty
Corp. amounted to $208,233. The Company was being repaid in the form
of a rent offset in the amount of $22,992 per year. See Note 8 for
details concerning the ownership of KPK Realty Corp. and the
guaranty by the Corporation of a debt between the present minority
shareholders and the former majority shareholder of the Corporation.
Additionally, the Company leases manufacturing space from DPPR
Realty Corp. (see Note 8), which is 100% owned by two of the
shareholders of the Corporation who in the aggregate own 36.84% of
the Company.
9
4- NOTES PAYABLE - BANKS
The Company has negotiated a credit facility dated August of 2003
with a major lending institution. The facility is secured by a first
priority interest in all accounts receivable, inventory and
equipment presently owned or hereafter acquired by the Company. The
indebtedness bears interest at the rate of 1/2 percent above the
prime rate of interest or a libor margin of 3%.
The terms of the facility require, among other things, the Company
to maintain certain financial ratios and levels of working capital,
which are set forth below: These financial ratios and levels of
working capital have been amended as of 5/14/04.
Minimum Tangible Net Worth
Closing Date -
12/31/03 - 12/30/04 $3,250,000
12/31/04 - 12/30/05 3,400,000
12/31/05 - Termination Date 3,800,000
Maximum Leverage
Closing Date -
12/31/03 - 12/30/04 3.00:1
12/31/04 - 12/30/05 2.80:1
12/31/05 - Termination Date 2.50:1
Working Capital
Closing Date - Termination Date $ 900,000
For the purpose of calculating the ratios, Prepaid Expenses are
considered to be a non-current asset and advances to KPK Realty
Corp. are considered to be an intangible asset. Notes Payable to
Bank are deemed to be current liabilities.
Tangible Net Worth, as defined in the loan agreement, amounted to
$4,740,028. The covenant for minimum Tangible Net Worth calls for
$3,400,000.
Working Capital, as defined in the loan agreement, amounted to
$3,594,887. The covenant for Working Capital calls for a minimum of
$900,000.
10
4- NOTES PAYABLE - BANKS (Continued)
The maximum leverage ratio, as defined in the loan agreement is
2.80. As of the Balance Sheet date, the maximum leverage ratio
amounted 2.51.
The loans are guaranteed jointly and severally by the principals of
the Company, as well as the affiliated company DPPR Realty Corp.
Except as amended, all other terms and conditions of the agreement
remained unchanged and continue in full force and effect.
5- NOTES PAYABLE-OFFICER
Notes Payable-Officer in the amount of $363,323 has been
subordinated in favor of the lending institution.
6- NOTES PAYABLE-EQUIPMENT
The Company has financed the purchase of various equipment, which is
secured by the related equipment. As of the Balance Sheet date, the
balance was $76,961, of which $67,116 is reflected as current.
Payments covering the remaining years are as follows:
2006 $ 67,116
2007 4,229
2008 4,205
2009 1,411
7- LEASE PAYABLE-EQUIPMENT
The Company has entered into various capital lease agreements
consisting of various types of manufacturing equipment, including
computer equipment. During the current period the Corporation
entered into a capital lease consisting of newly acquired equipment
and refinanced its existing equipment, notes and leases. Payments
covering the next five years are as follows:
2006 $ 346,184
2007 367,099
2008 394,151
2009 140,983
2010 --
11
8- COMMITMENTS AND CONTINGENCIES
The Company presently leases manufacturing and office facilities
under a lease expiring May 31, 2005, at an annual rental of
$300,000, plus annual real estate tax payable by the lessee. An
extension through November 30, 2005 has been executed by both the
lessor and the lessee.
This lease is between the Company and KPK Realty Corp., a
corporation in which 49% is owned by the majority stockholder of the
Company. Additionally, the Company is a guarantor of the mortgage on
the leased premises. The present balance of that mortgage is
approximately $677,000.
The Company also leases manufacturing facilities pursuant to a lease
expiring in 2014 at an annual rental of $82,800, plus annual real
estate tax payable by the lessee. This lease is between the Company
and DPPR Realty Corporation, a corporation owned by the stockholders
of the Corporation. Additionally, the Company is a guarantor of the
mortgage on the leased premises. The present balance of that
mortgage is approximately $567,000.
Additionally, the Company is a guarantor on an obligation to a
former shareholder that had a 49% equity position in the
Corporation. The former shareholder sold his stock for the original
obligation of $1,250,000. As of the date of this report this
obligation has been satisfied.
A legal action has been brought against the Company for personal
injury sustained by an independent contractor caused by a fall on
the premises of the Company in the amount of $5,000,000. This action
is scheduled for trial in June of 2005. The Company has insurance
coverage in the amount of $4,000,000. At a settlement mediation,
plaintiff made a demand of $2,000,000. In the opinion of counsel
representing the Company the full value of the case would be well
within the insurance coverage maintained by the Company.
SUPPLEMENTARY INFORMATON
12
AIR INDUSTRIES MACHINING CORPORATION
Comparative Schedules of Expenses
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- -------------
MANUFACTURING OVERHEAD
Material, Tools and Supplies $ 773,058 $ 490,577
Equipment Rental -- 33,729
Premium Pay 286,450 222,070
Sick Pay/Vacation Pay 94,319 80,528
Holiday Pay 40,304 28,102
Rent 376,234 350,139
Light and Power 182,550 197,196
Factory Maintenance 329,315 212,724
Depreciation and Amortization 261,639 320,446
Employee Benefits 139,771 124,175
Payroll Taxes 491,337 404,117
Insurance 212,477 171,629
Group Insurance 1,038,796 853,232
Indirect Payroll 3,380,803 2,622,924
---------- ----------
TOTAL MANUFACTURING OVERHEAD $7,607,053 $6,111,588
========== ==========
SELLING EXPENSES
Field Engineer $ 7,930 $ 7,942
Shipping Supplies 84,007 74,295
Meetings and Conferences 12,370 13,507
Automotive Expenses 56,308 43,754
Freight Out 69,426 74,579
Depreciation - Automotive Equipment 14,084 10,465
---------- ----------
TOTAL SELLING EXPENSES $ 244,125 $ 224,542
========== ==========
The accompanying review report and notes are an integral
part of these statements.
13
AIR INDUSTRIES MACHINING CORPORATION
Comparative Schedules of Expenses
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- -------------
GENERAL AND ADMINISTRATIVE EXPENSES
Officers' Salaries $ 387,376 $ 367,933
Office Salaries 222,014 179,528
Rent 61,247 57,000
Telephone 32,087 34,175
Light and Power 29,652 32,102
Payroll Taxes 32,170 34,225
Employee Benefits 12,024 6,250
Professional Fees 315,449 56,410
Office Expenses 28,853 32,841
Depreciation - Furniture and Fixtures 41,648 50,132
Sundry 11,890 --
Premiums - Officers' Life Insurance 45,022 59,958
Donations 700 1,200
Payroll Processing & Computer Costs 67,079 69,225
---------- ----------
TOTAL GENERAL & ADMINISTRATIVE EXPENSES $1,287,211 $ 980,979
========== ==========
The accompanying review report and notes are an integral
part of these statements.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma balance sheet combines the historical
balance sheet of Air Industries Machining, Corp. ("AIM") as of September 30,
2005 and the historical balance sheets of each of Ashlin Development Corporation
("Ashlin") and Gales Industries Incorporated ("Gales Industries") as of
September 30, 2005.
The following unaudited pro forma statements of income combine the
historical statements of income of AIM, Ashlin and Gales Industries for the
nine-months ended September 30, 2005 and year ended December 31, 2004, giving
effect to the Merger and the Acquisition as if they had occurred on January 1,
2004.
We are providing this information to aid you in your analysis of the
financial aspects of the Merger and the Acquisition. The unaudited pro forma
financial statements described above should be read in conjunction with the
historical financial statements of AIM and Ashlin and the related notes thereto.
The unaudited pro forma information is not necessarily indicative of the
financial position or results of operations that may have actually occurred had
the Merger and the Acquisition taken place on the dates noted, or the future
financial position or operating results of the combined company.
The unaudited pro forma financial statements were prepared treating the
Merger as a reverse acquisition under the purchase method of accounting with AIM
treated as the acquirer.
Ashlin Development Corporation
Unaudited Pro Forma Consolidated Comparative Balance Sheet
September 30, 2005
Air Industries Pro Forma
Machining Corporation Balance Sheet
ASSETS Adjustments
Current Assets:
Cash and Cash Equivalents 238,727 238,727 (a)
Accounts Receivable 2,269,778 -- 2,269,778
Inventory 12,034,369 -- 12,034,369
Prepaid Expenses 76,709 -- 76,709
Other Current Assets 4,864 -- 4,864
-------------- --------------
Total current assets 14,624,447 14,385,720
-------------- --------------
Goodwill (1,631,071) (b) 1,631,071
Property Plant & Equipment
Equipment, Furniture. etc. (Net) 1,918,621 -- 1,918,621
Plant (4,123,031) (c) 4,123,031
-------------- --------------
Total property, plant, equipment 1,918,621 6,041,652
-------------- --------------
Deferred Charges and Other Assets
Security Deposits 41,122 -- 41,122
Cash Value Officer's Life 52,334 -- 52,334
Organization Expenses 500 (79,900) (d) 80,400
Unamortized Finance Cost 33,483 (167,916) (e) 201,399
Advances to Affiliates -- -
-------------- --------------
Total deferred charges and other assets 127,439 375,255
-------------- --------------
-------------- --------------
Total Assets 16,670,507 22,433,698
============== ==============
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities:
Cash Overdraft
Accounts Payable and Accrued Expenses 4,137,723 -- 4,137,723
Advance Payment - Customer 667,772 -- 667,772
Notes Payable - Equipment 67,116 -- 67,116
Lease Payable - Equipment 346,184 -- 346,184
Notes Payable Insurance 31,567 -- 31,567
Accrued Operating Expenses 554,056 373,894 (f) 927,950
-------------- --------------
Total current liabilities 5,804,418 6,178,312
-------------- --------------
Long Term Liabilities
Term Loan Real Estate 2,834,993 (g) 2,834,993
Notes Payable - Banks 5,180,000 (229,171) (h) 4,950,829
Notes Payable - Equipment 9,845 -- 9,845
Lease Payable - Equipment 902,233 -- 902,233
Bridge Notes -- --
Note Seller 1,291,212 (i) 1,291,212
Notes Payable: Component of Sale -- --
Notes Payable - Officer 363,323 (363,323) (j) --
-------------- --------------
Total long term liabilities 6,455,401 9,989,112
-------------- --------------
Total liabilities 12,259,819 16,167,424
-------------- --------------
Stockholders Equity:
Common Stock - 95 shares no par value 32,223 (32,223) (k)
Common stock (7,480,757@ $.0001per share) 748 (l) 748
Common stock ( Bridge ) 22,500 (m) 22,500
Common stock ( Subscription Receivable ) -- --
Additional Paid In Capital 172,628 (172,628)
Preferred stock 5,361,739 (n) 5,361,739
Retained earnings 4,301,837 (3,420,550) (o) 881,287
Treasury Stock (96,000) 96,000 (p)
-------------- --------------
Total stockholder's equity 4,410,688 6,266,274
-------------- --------------
Total Liabilities and Stockholder's Equity 16,670,507 -- 22,433,698
============== ==============
Notes to Pro Forma Combined Balance Sheet
(a) Represents the application of the cash on hand to satisfy a portion of
notes due to banks.
(b) Represents the goodwill resulting from the excess of the purchase price
paid for the stock of after adjusting the value of the assets acquired and
liabilities assumed to reflect the purchase price.
(c) Represents the purchase price of the company's corporate campus pursuant
to the Real Estate Purchase Agreements with DDPR Realty Corp. and KPK
Realty Corp.
(d) Represents expenses incurred in connection with the organization of Gales
Industries Incorporated and its subsidiary.
(e) Represents adjustment to finance costs as a result of the costs incurred
in connection with the loan from PNC Bank.
(f) Represents a provision for income taxes for the year ended December 31,
2004, and the nine months ended September 30, 2005, offset in part by
(g) Represents amounts borrowed to acquire the real estate referred to in Note
(c).
(h) Represents the repayment of the loan due from AIM to Citibank, N.A.
offset, in part, by amounts borrowed from PNC Bank.
(i) Represents notes issued to shareholders of AIM as part of the purchase
price under the Stock Purchase Agreement.
(j) Represents the payment of notes due from AIM to certain of its officers.
(k) Represents the elimination of shares held by former shareholders of AIM.
(l) Represents the issuance of shares of Gales Industries, Incorporated.
(m) Represents the excess of amounts paid over par value of Gales Industries.
(n) Represents net amount received upon issuance of preferred shares.
(o) Represents elimination of retained earnings of AIM accrued prior to
January 1, 2004.
(p) Represents elimination of amounts allocated to shares held in treasury by
AIM.
Ashlin Development Corportation
Pro Forma Combined Statement of Income
Year ended ADJUSTED
December 31,2004 Adjustments December 31, 2004
------------------------------------------------------------
NET INCOME FROM SALES 24,818,333 24,818,333
COST OF GOODS SOLD
Inventory, Beginning 9,873,378 9,873,378
Purchases 3,882,760 3,882,760
Sub-Contracting 3,767,089 3,767,089
Finishing 2,531,021 2,531,021
Hardware 1,908,026 1,908,026
Direct Labor 2,280,036 2,280,036
Overhead (See Expense Schedule "A" Below) 8,501,899 (500,930) (a)(b) 8,000,969
------------------------------- -------------
32,744,209 (500,930) 32,243,279
Less: Inventory, Ending 11,108,456 11,108,456
------------------------------- -------------
COST OF GOODS SOLD 21,635,753 (500,930) 21,134,823
------------------------------- -------------
GROSS PROFIT 3,182,580 $ 500,930 3,683,510
OTHER INCOME 2,573 $ -- 2,573
------------------------------- -------------
TOTAL INCOME 3,185,153 500,930 3,686,083
EXPENSES
Selling 321,727 -- 321,727
Gen. & Admin. (See Sch. "B" below) 1,390,475 103,391 (a)(b) 1,493,866
Interest and Amortization 517,511 143,234 (c) 660,745
Franchise Tax 669 (669) (d) -
------------------------------- -------------
TOTAL EXPENSES 2,230,382 245,956 2,476,338
------------------------------- -------------
NET INCOME BEFORE INCOME TAXES 954,771 $ 254,974 1,209,745
--
INCOME TAXES (@ 40%) 381,908 $ 101,990 $ 483,898
------------------------------- -------------
NET INCOME AFTER INCOME TAXES 572,863 152,984 725,847
=============================== =============
Ashlin Development Corportation
Year ended ADJUSTED
A MANUFACTURING OVERHEAD December 31,2004 Adjustments December 31, 2004
--------------------------------------------------------------------------------------------------
Material, Tools and Supplies 759,319 -- -- 759,319
Equipment Rental 33,729 -- -- 33,729
Premium Pay 306,196 -- -- 306,196
Sick Pay/Vacation Pay 131,153 -- -- 131,153
Holiday Pay 50,744 -- -- 50,744
Rent 456,917 (456,917) (b) -
Real Estate Taxes -- 127,709 (b) 127,709
Light and Power 278,254 -- -- 278,254
Factory Maintenance 313,005 -- -- 313,005
Depreciation and Amortization 349,114 49,884 (b) 398,998
Employee Benefits 169,708 -- -- 169,708
Payroll Taxes 552,969 (22,426) (a) 530,543
Insurance 239,018 -- -- 239,018
Group Insurance 1,144,381 -- -- 1,144,381
Consulting 50,000 (a) 50,000
Indirect Payroll 3,717,392 (249,180) (a) 3,468,212
------------------------------- ----------------
TOTAL MANUFACTURING OVERHEAD 8,501,899 (500,930) -- 8,000,969
=============================== ================
SELLING EXPENSES
Field Engineer 13,643 -- 13,643
Shipping Supplies 107,507 -- 107,507
Meetings and Conferences 20,628 -- 20,628
Automotive Expenses 52,983 -- 52,983
Freight Out 108,187 -- 108,187
Depreciation - Automotive Equipment 18,779 -- 18,779
-------------- ----------------
TOTAL SELLING EXPENSES 321,727 321,727
============== ================
Ashlin Development Corportation
Year ended ADJUSTED
B GENERAL AND ADMIN. EXP. December 31,2004 Adjustments December 31, 2004
---------------------------------------------------------
Officers' Salaries 499,675 156,708 (a) 656,383
Office Salaries 256,846 -- -- 256,846
Rent 74,382 (74,382) (b) --
Real Estate Taxes -- 20,790 (b) 20,790
Telephone 52,487 -- -- 52,487
Light and Power 45,297 -- -- 45,297
Payroll Taxes 40,917 14,104 -- 55,021
Employee Benefits 7,800 -- -- 7,800
Professional Fees 173,369 -- -- 173,369
Office Expenses 34,412 -- -- 34,412
Depreciation 55,531 12,792 (b) 68,323
Sundry 9,524 -- -- 9,524
Premiums - Officers' Life Insurance 26,621 (26,621) --
Donations 3,200 -- -- 3,200
Payroll Processing & Computer Costs 110,414 -- -- 110,414
--------------------------- ----------------
TOTAL GENERAL & ADMIN. EXP. 1,390,475 103,391 1,493,866
=========================== ================
Ashlin Development Corportation
Pro Forma Combined Statement of Income
Nine Mo. Ended ADJUSTED
September 30, September 30,
2005 Adjustments 2005
------------------------------------------------------
NET INCOME FROM SALES 21,851,532 -- 21,851,532
-- -
COST OF GOODS SOLD -- -
Inventory, Beginning 11,108,456 -- 11,108,456
Purchases 3,382,443 -- 3,382,443
Sub-Contracting 2,858,473 -- 2,858,473
Finishing 2,158,583 -- 2,158,583
Hardware 1,896,726 -- 1,896,726
Direct Labor 2,072,801 -- 2,072,801
Overhead (See Expense Schedule "A" Below) 7,607,053 (422,148) (e)(f) 7,184,905
----------------------------- ------------
31,084,535 (422,148) 30,662,387
Less: Inventory, Ending 12,034,369 12,034,369
----------------------------- ------------
COST OF GOODS SOLD 19,050,166 (422,148) 18,628,018
----------------------------- ------------
GROSS PROFIT 2,801,366 422,148 3,223,514
OTHER INCOME 152 152
----------------------------- ------------
TOTAL INCOME 2,801,518 422,148 3,223,666
EXPENSES
Selling 244,125 -- 244,125
Gen. & Admin. (See Sch. "B" below) 1,287,211 29,018 (e)(f) 1,316,229
Interest and Amortization 411,493 117,651 (g) 529,144
Franchise Tax 516 (516) (h) -
----------------------------- ------------
TOTAL EXPENSES 1,943,345 146,153 2,089,498
-----------------------------
NET INCOME BEFORE INCOME TAXES 858,173 275,995 1,134,168
INCOME TAXES (@ 40%) 343,269 110,398 453,667
----------------------------- ------------
NET INCOME AFTER INCOME TAXES 514,904 165,597 680,501
============================= ============
Ashlin Development Corportation
Nine Mo. Ended ADJUSTED
September 30, September 30,
A MANUFACTURING OVERHEAD 2005 Adjustments 2005
------------------------------------------------------------------------------------------------
Material, Tools and Supplies 773,058 -- -- 773,058
Equipment Rental -- -- -- --
Premium Pay 286,450 -- -- 286,450
Sick Pay/Vacation Pay 94,319 -- -- 94,319
Holiday Pay 40,304 -- -- 40,304
Rent 376,234 (376,234) (e) -- --
Real Estate Taxes -- 129,328 (e) -- 129,328
Light and Power 182,550 -- -- 182,550
Factory Maintenance 329,315 -- -- 329,315
Depreciation and Amortization 261,639 37,413 (e) -- 299,052
Employee Benefits 139,771 -- -- 139,771
Payroll Taxes 491,337 (20,655) (f) -- 470,682
Insurance 212,477 -- -- 212,477
Group Insurance 1,038,796 -- -- 1,038,796
Consulting -- 37,500 (f) -- 37,500
Indirect Payroll 3,380,803 (229,500) (f) -- 3,151,303
--------------------------- ------------
TOTAL MANUFACTURING OVERHEAD 7,607,053 (422,148) 7,184,905
=========================== ============
SELLING EXPENSES
Field Engineer 7,930 7,930
Shipping Supplies 84,007 84,007
Meetings and Conferences 12,370 12,370
Automotive Expenses 56,308 56,308
Freight Out 69,426 69,426
Depreciation - Automotive Equipment 14,084 14,084
--------------------------- ------------
TOTAL SELLING EXPENSES 244,125 -- 244,125
=========================== ============
Ashlin Development Corportation
Nine Mo. Ended ADJUSTED
September 30, September 30,
B GENERAL AND ADMIN. EXP. 2005 Adjustments 2005
--------------------------------------------------------
Officers' Salaries 387,376 96,000 (e) 483,376
Office Salaries 222,014 -- -- 222,014
Rent 61,247 (61,247) (f) --
Real Estate Taxes -- 21,053 (f) 21,053
Telephone 32,087 -- -- 32,087
Light and Power 29,652 -- -- 29,652
Payroll Taxes 32,170 8,640 -- 40,810
Employee Benefits 12,024 -- -- 12,024
Professional Fees 315,449 -- -- 315,449
Office Expenses 28,853 -- -- 28,853
Depreciation 41,648 9,594 (f) 51,242
Sundry 11,890 -- -- 11,890
Premiums - Officers' Life Insurance 45,022 (45,022) -- --
Donations 700 -- -- 700
Payroll Processing & Computer Costs 67,079 -- -- 67,079
-- -- -- --
----------------------------- -----------
TOTAL GENERAL & ADMIN. EXP. 1,287,211 29,018 1,316,229
============================= ===========
Notes to Pro Forma Combined Statement of Income
(a) Represents the combined net impact of the following:
(i) Elimination from overhead of an allocable portion of the salary and
related payroll expenses in an aggregate amount of $ 315,369 as a
result of the termination of Luis Peragallo, Jorge Peragallo and
George Kfoury, partially offset by
(ii) The inclusion of an allocable portion of the salary and related
payroll expenses in an aggregate amount of $116,189 as a result of
the employment of Louis Giusto, an increase in the salary of Dario
Peragallo and the engagement of George Kfoury as a consultant,
(iii) Elimination from General and Administrative expense of an allocable
portion of salary and related payroll expenses in an aggregate
amount of $315,369 as a result of the termination of Luis Peragallo,
Jorge Peragallo and George Kfoury, offset by
(iv) The inclusion of an allocable portion of salary and related payroll
expenses in an aggregate amount of $472,077 as a result of the
employment of Louis Giusto and Michael Gales and an increase in the
salary of Peter Rettaliata.
(b) Represents the combined net impact of the following:
(i) The elimination from each Manufacturing Overhead and General and
Administrative Expense of an allocable portion of rent expense of
$382,800 as a result of the acquisition of the corporate campus,
partially offset by
(ii) The inclusion in each of Manufacturing Overhead and General and
Administrative Expense of an allocable portion of depreciation and
amortization expenses in the aggregate of $62,677 associated with
the land and buildings included in the real estate referred to in
note (b)(i).
(c) Represents the increase in interest expense associated with the increase
in bank debt partially offset by the reduction in interest rates.
(d) Represents the elimination of franchise taxes payable by AIM.
(d) Represents the combined net impact of the following:
(i) Elimination from overhead of an allocable portion of the salary and
related payroll expenses in an aggregate amount of $ 241,376 as a
result of the termination of Luis Peragallo, Jorge Peragallo and
George Kfoury, partially offset by
(ii) The inclusion of an allocable portion of the salary and related
payroll expenses in an aggregate amount of $49,375 as a result of
the employment of Louis Giusto, an increase in the salary of Dario
Peragallo and the engagement of George Kfoury as a consultant,
(iii) Elimination from General and Administrative expense of an allocable
portion of salary and related payroll expenses in an aggregate
amount of $297,313 as a result of the termination of Luis Peragallo,
Jorge Peragallo and George Kfoury, offset by
(iv) The inclusion of an allocable portion of salary and related payroll
expenses in an aggregate amount of $337,375 as a result of the
employment of Louis Giusto and Michael Gales and an increase in the
salary of Peter Rettaliata.
(f) Represents the combined net impact of the following:
(i) The elimination from each Manufacturing Overhead and General and
Administrative Expense of an allocable portion of rent expense of
$287,100 as a result of the acquisition of the corporate campus,
partially offset by
(iii) The inclusion in each of Manufacturing Overhead and General and
Administrative Expense of an allocable portion of depreciation and
amortization expenses in an aggregate amount of $47,007 associated
with the land and buildings included in the real estate referred to
in note (b)(i).
(g) Represents the increase in interest expense associated with the increase
in bank debt partially offset by the reduction in interest rates.
(h) Represents the elimination of franchise taxes payable by AIM.
ASHLIN DEVELOPMENT CORPORATION
LIST OF EXHIBITS FILED WITH 8-K
Exhibit Nos.
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4.1 Convertible Promissory Note, dated November 30, 2005, in the
amount of $332,631, from Gales Industries Incorporated (and
assumed by the Registrant) to Peter Rettaliata.
4.2 Convertible Promissory Note, dated November 30, 2005, in the
amount of $332,631, from Gales Industries Incorporated (and
assumed by the Registrant) to Dario Peragallo.
4.3 Form of Warrant to be issued by the Registrant to GunnAllen
Financial, Inc. after completion of the Offering.
4.5 Form of Warrant issued by Gales Industries Incorporated (and
assumed by the Registrant) to investors in the $45,000 Bridge
Financing in or about August 2005.
4.6 Form of Warrant issued by Gales Industries Incorporated (and
assumed by the Registrant) to investors in the $105,000 Bridge
Financing in or about September, 2005.
10.2 Stock Purchase Agreement, dated as of July 25, 2005, by and
among Gales Industries Incorporated, Air Industries Machining,
Corp., Luis Peragallo, Jorge Peragallo, Peter Rettaliata and
Dario Peragallo.
10.3 Secured Subordinated Promissory Note, dated November 30, 2005,
in the amount of $962,000, from Gales Industries Incorporated
(and assumed by the Registrant) to Luis Peragallo.
10.4 Security Agreement, dated as of November 30, 2005, by and
between Gales Industries Incorporated (and assumed by the
Registrant) and Luis Peragallo.
10.5 Contract of Sale, dated as of November 7, 2005, by and between
DPPR Realty Corp. and Gales Industries Incorporated for the
purchase of the property known as 1480 North Clinton Avenue, Bay
Shore, NY.
10.6 Contract of Sale, dated as of November 7, 2005, by and between
KPK Realty Corp. and Gales Industries Incorporated for the
purchase of the property known as 1460 North Fifth Avenue and
1479 North Clinton Avenue, Bay Shore, NY.
10.7 Employment Agreement, dated as of September 26, 2005, by and
between Gales Industries Incorporated (and assumed by the
Registrant) and Michael A. Gales.
10.8 Employment Agreement, dated as of September 26, 2005, by and
between Louis A. Giusto and Gales Industries Incorporated (and
assumed by the Registrant).
10.9 Employment Agreement, dated as of September 26, 2005, by and
among Gales Industries Incorporated (and assumed by the
Registrant), Air Industries Machining, Corp. and Peter D.
Rettaliata.
10.10 Employment Agreement, dated as of September 26, 2005, by and
among Gales Industries Incorporated (and assumed by the
Registrant), Air Industries Machining, Corp. and Dario
Peragallo.
10.14 2005 Stock Incentive Plan of Gales Industries Incorporated.
10.15 Stock Option Agreement, dated as of September 26, 2005, by Gales
Industries Incorporated (and assumed by the Registrant) with
Michael A. Gales.
10.16 Stock Option Agreement, dated as of September 26, 2005, by Gales
Industries Incorporated (and assumed by the Registrant) with
Louis A. Giusto.
10.17 Stock Option Agreement, dated as of September 26, 2005, by Gales
Industries Incorporated (and assumed by the Registrant) with
Peter Rettaliata.
Exhibit Nos.
------------
10.18 Stock Option Agreement, dated as of September 26, 2005, by Gales
Industries Incorporated (and assumed by the Registrant) with
Dario Peragallo.
10.19 Revolving Credit, Term Loan, Equipment Line and Security
Agreement, dated as of November 30, 2005, by and between Air
Industries Machining, Corp., PNC Bank, National Association, as
Lender, and PNC Bank, National Association, as Agent.
10.20 Mortgage and Security Agreement, dated as of November 30, 2005,
by and between Air Industries Machining, Corp. and PNC Bank.
10.21 Long Term Agreement, dated as of August 18, 2000, between Air
Industries Machining, Corp. and Sikorsky Aircraft Corporation.
10.22 Long Term Agreement, dated as of September 7, 2000, between Air
Industries Machining, Corp. and Sikorsky Aircraft Corporation.
21.1 List of Subsidiaries.